Exactly: EU Says US Policies on "Road to Hell"

♠ Posted by Emmanuel in ,, at 3/26/2009 04:52:00 AM

Sometime ago, I lauded the first Czech PM Vaclav Havel's high opinion of Frank Zappa as encapsulated by then-US Secretary of State James Baker's clear annoyance when he said, "You can do business with the United States or you can do business with Frank Zappa." The obvious flaw in Baker's reasoning was that Zappa was very much your archetypal exponent of American capitalism. Now it seems current (endangered) Czech PM Mirek Topolanek is also a big music fan. (The Czech Republic is current EU rotating head.) In this case, I believe that he's cranking Aussie AC/DC. Like me, ol' Mirek has a similarly dim view of America's so far ineffective efforts to revive its moribund economy. Yes, he says, America is on the road to hell. Friedrich Hayek and Angus Young--what a combination.

He is hardly alone as several other countries are being hurt by these infantile policies. Obamanite protectionism [e.g., 1, 2, 3, 4] has been widely noted here in addition to ridiculous stimulus packages that do nothing other than destroy the dollar's value--a real concern among those who hold it as a reserve currency. Just yesterday, another Geithner slip from the line that the currency is fine and dandy caused the beleaguered greenback to sag in FX markets. What else can I say? I think that, if possible, the rest of the world would prefer not to be taken along for a doomed ride by America's junk policies. In the real world, however, we are nearing a time when others will have to work together to stop this abusive behavior. It's time to hold Washington's feet to the fire. From the Financial Times:
European Union hopes for a new era in relations with the US were thrown into chaos on Wednesday when the holder of the EU presidency condemned American remedies for the global recession as “the road to hell”.

Barely a week before Barack Obama is due to arrive in Europe on his first official visit as US president, Mirek Topolanek, the Czech Republic’s prime minister, put the 27-nation EU on a collision course with Washington...

“The US Treasury secretary talks about permanent action and we, at our spring council, were quite alarmed at that...The US is repeating mistakes from the 1930s, such as wide-ranging stimuluses, protectionist tendencies and appeals, the Buy American campaign, and so on,” he told a European parliament session in Strasbourg. “All these steps, their combination and their permanency, are the road to hell.”

US officials made no comment on the remarks. But the Obama administration says it took great pains to ensure that the Buy American provisions in the $787bn (€579bn) stimulus that the president signed into law last month were consistent with World Trade Organisation rules. It followed, therefore, that any attempt to make them permanent would continue to be consistent with WTO rules.

EU diplomats said it was the most extraordinary outburst from a political leader in charge of running the EU’s affairs since Silvio Berlusconi, Italy’s prime minister, caused uproar in 2003 when he likened a German socialist member of the European parliament to a Nazi concentration camp guard.

Other leaders of EU member states, including Angela Merkel, Germany’s chancellor, disagree with US calls for big fiscal stimuli to battle the recession. But they have couched their opposition in more diplomatic language than Mr Topolanek’s. The Czech leader was speaking eight days before Mr Obama was due to arrive in London for a G20 summit of the world’s developed and emerging economies.
The analogy to the 1930s is inapt, but the analysis is generally correct as you'd expect me to say. Moreover, why should a group of countries that follows sound money principles be punished for not going along with a heavily distorted view of stimulus manna from above? My view will never change in that observing sound money principles will pay off in the long run. Short-term pressure by exporters to engage in currency debasement to "increase competitiveness" comes at the expense of long-term costs in inflicting mountains of debt on future generations and making holders of your currency think twice. The US would like you to think this tradeoff doesn't exist, but it should know better.
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A Petition Against Protectionism

♠ Posted by Emmanuel in at 3/26/2009 02:59:00 AM
Since both Jonathan Dingel and Ben Muse have already done so--both of whom maintain what I consider as peer blogs--I thought it only proper to mention this petition from the Atlas Economic Research Foundation against the troubles with protectionism. As this place has threatened to become the International Protectionism Economy Zone due to seemingly endless stories of trade barriers being erected, here you go. What follows is a snippet of the statement:
But the fact that protectionism destroys wealth is not its worst consequence. Protectionism destroys peace. That is justification enough for all people of good will, all friends of civilization, to speak out loudly and forcefully against economic nationalism, an ideology of conflict, based on ignorance and carried into practice by protectionism.

Two hundred and fifty years ago, Montesquieu observed that “Peace is the natural effect of trade. Two nations who differ with each other become reciprocally dependent; for if one has an interest in buying, the other has an interest in selling; and thus their union is founded on their mutual necessities.”

Trade’s most valuable product is peace. Trade promotes peace, in part, by uniting different peoples in a common culture of commerce – a daily process of learning others’ languages, social norms, laws, expectations, wants, and talents.
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See? US Frowns On Alternative Reserve Currency

♠ Posted by Emmanuel in , at 3/25/2009 12:48:00 AM
In recent days, we have gone on a mini-binge of reserve alternative stories [1, 2, 3]. Bang on schedule, the United States is pooh-poohing the notion that an alternative reserve currency and medium of exchange for world trade is needed. Debase the dollar? Not me, says the US. First up, let's see what Obama has to say:

There is no need for a global currency to replace the dollar as suggested by Chinese leaders, President Barack Obama said Tuesday. "The dollar is extraordinarily strong right now," he said, because the American economy and political system are stronger than many others.
Yes, whatever. These guys are starting to sound exactly like Bush and Paulson with the tragicomic "strong dollar" theme that any reasonably informed commentator would see through. Speaking of whom, US Treasury Secretary Tim Geithner and Fed Chairman Ben Bernanke also chimed in with the same message. From MarketWatch:

Federal Reserve Board Chairman Ben Bernanke and Treasury Secretary Timothy Geithner flatly rejected on Tuesday a call from a senior Chinese official to drop the dollar as the world's key reserve currency. Zhou Xiaochuan, head of the People's Bank of China, proposed the creation a new international reserve currency in an essay published on the central bank's Web site on Monday.

The proposal is the latest sign of tension between China and the U.S. over important global economic matters. Zhou is expected to attend the Group of 20 meeting in London on April 2 where reform of the global financial system is on the table...
The MarketWatch article also contains currency watchers' opinions of what is going on. Both commentators seem to be suggesting China is just firing a warning shot across the bow, not taking aim at the mast:

Axel Merk, president and chief investment officer at Merk Investments, said that Zhou's views "reflect China's frustration in relying on the U.S. dollar as the world's reserve currency, when U.S. policy makers conduct monetary policy based on domestic considerations." "That's a friendly way of expressing that the U.S. may be trying to debase the dollar, raising concern in China about the value of its massive U.S. dollar denominated reserves," Merk said in a research note. Central banks around the world won't be willing to yield power to a new world monetary authority, specifically the IMF, Merk said. "We believe China may realize sooner rather than later that building a diversified basket of reserves followed by a free floating exchange rate, will provide China with the advantages China's central bank governor is seeking," he said.

Marc Chandler, currency strategist at Brown Brothers Harriman, said that China has not sought to undermine the U.S. dollar. "Just as important is what China is not saying," Chandler said. "It is not saying it will dump dollars. It is not saying it will buy more euros." The support for a new international reserve asset seems to be an attempt to get around the contradictory pressures on a national currency that is also a reserve asset, he said. "The dollar's role seems as secure as ever," Chandler said. "There is no clear national alternative and a new international asset cannot simply be foisted on countries. The dollar remains numeraire, imperfections and all."
It is no surprise to me that the United states is keen to scuttle the Chinese proposal. After all, who would remain as keen to fund America's enormous deficits if its currency were no longer the world's main reserve currency and medium of exchange in international trade? Once more, I am surprised how uninformed commentary on this proposal has been in much of the blogosphere. For instance, there has not been much discussion of the evolution of the international monetary system in the postwar period--something Zhou goes into at some length. To be honest, your average Amerocentric blogger wouldn't know the difference between an SDR and a DDR3.

To get things done, China will need the assent of many other countries also concerned about ongoing dollar debasement. Think of other Asian exporters and Middle East oil exporters who too have played a significant role in funding US deficits in recent years. As the commentator Chandler said, China needs to put its money where its mouth is at by moving away from dollar purchases if it is to be taken seriously. With PRC exports to the US shrinking anyway, this should be happening in fairly short order if China is really serious about it.

Can the IMF be the place where moving away from the dollar to an upgraded SDR? Again, effective American "veto power" in having a 15% share of SDRs or voting rights will likely block any such initiative from being started without significant LDC cooperation. So far, it is notable that China has resisted calls to participate more in the IMF. Whether it is wary of US influence or wants more changes like upgrading SDRs we cannot really tell from the outside looking in. Ultimately, though, the ball is in China's court. How it accumulates or diversifies away from dollars will be key in determining whether this latest tantrum is just more bluster or something more significant.
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California's Tent City of the Foreclosed is Closed

♠ Posted by Emmanuel in , at 3/24/2009 10:03:00 AM
I thought it right to post about this to achieve some, ah, closure. In times past, I have marveled about the existence of a tent city of the foreclosed at the heart of America's wealthiest state, California [1, 2]. Recently, I had an upsurge in hits for these two older posts, making me wonder what was going on. It turns out that Ontario, CA was featured on the Oprah Winfrey show. For so long, Hollywood has sold the California Dream like a giant Beach Boys soundtrack. However, the housing implosion in the boom-to-bust Inland Empire has meant skyrocketing foreclosure rates, forcing many to live in the now-infamous Tent City of the Foreclosed. It appears this shantytown has given the California Dream a black eye as officials are now in a hurry to close it down in embarrassment. From Reuters:
The mayor of California's state capital unveiled plans on Thursday to shut down a sprawling "tent city" of the homeless that has drawn worldwide media attention as a symbol of U.S. economic decline. Sacramento Mayor Kevin Johnson promised to first make alternative shelter space available for the estimated 150 men and women who inhabit the squalid encampment near the American River, at the edge of the city's downtown.

Johnson, who toured the area with California Governor Arnold Schwarzenegger a day earlier, said he hoped to have the ramshackle settlement cleared of tents and debris in the next two to three weeks. "We want to move as quickly as we can," he told a news conference, insisting the city was determined to treat the tent dwellers with compassion. "They are people out there. We have to do whatever we can do," he said. "We as a city are not going to shy away from it. We're going to tackle it head-on." Advocates for the homeless applauded the mayor's action. Municipal authorities in Sacramento have been debating the fate of the tent city for weeks.

Sacramento has one of the highest mortgage foreclosure rates in the United States, and the homeless total in the city and surrounding county is estimated to have jumped nearly 10 percent last year to nearly 2,700. About half are believed to be living outdoors, according to a local survey.
And so ends the California Dream, as fake as a Hollywood set--or an AAA CDO for that matter. At least in the Tent City of the Foreclosed you had a tent ownership society, to paraphrase Dubya. Now it's gone like Greta Garbo.
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My Wish Come True? China Backing $ Alternative

♠ Posted by Emmanuel in , at 3/23/2009 04:21:00 PM
Well here's some potentially very welcome news. In recent days, I have discussed proposals emanating from the UN concerning the creation of an alternative reserve currency to the US dollar [1, 2]. I liken the US to a lumbering giant drunk on massive amounts of debt plied by LDCs even its behavior becomes more and more irregular with its various stimulus cravings. What is common to the various UN proposals has been the absence of a key dollar victim/co-perpetrator in creating massive global economic imbalances--China. Well, it appears that my wish is coming true (at least in part) as China realizes the future extent of its losses if it continues accumulating money-losing $ holdings as the US prints money like there's no tomorrow. So, it's time to stop juicing the debt addict and allow it to collapse under the weight of its habitual binging. Cold turkey is what's best for America.

The Financial Times pointed out that the governor of the People's Bank of China (PBoC), Zhou Xiaochuan, has released a missive on the PBoC website suggesting measures reminiscent of those proposed by the UN and Stiglitz. However, China getting in the action would be the game-changer as I've suggested many, many times before. I suggest that you read the PBoC missive in its entirety even if the translation is not the best. The juicy parts I will excerpt here. This is the intro:
The outbreak of the current crisis and its spillover in the world confronted us with the long existing but still unanswered question--i.e., what kind of international reserve currency do we need to secure global financial stability and facilitate world economic growth, which was one of the purposes for establishing the IMF? There were various institutional arrangements in an attempt to find a solution, including the Silver Standard, the Gold Standard, the Gold Exchange Standard and the Bretton Woods system. The above issue, however, as the ongoing financial crisis demonstrates, is far from being solved, and has become even more severe due to the inherent weaknesses of the current international monetary system.

Theoretically, an international reserve currency should first be anchored to a stable benchmark and issued according to a clear set of rules, therefore to ensure orderly supply; second, its supply should be flexible enough to allow timely adjustment according to the changing demand; third, such adjustments should be disconnected from economic conditions and sovereign interests of any single country. The acceptance of credit-based national currencies as major international reserve currencies, as is the case in the current system, is a rare special case in history. The crisis called again for creative reform of the existing international monetary system towards an international reserve currency with a stable value, rule-based issuance and manageable supply, so as to achieve the objective of safeguarding global economic and financial stability.
After alluding to how the US keeps abusing the privilege of issuing the world's standard reserve currency such as Bernanke's various money for nothing gambits, Zhou geets to discussing the benefits of a true supranational reserve currency:
A super-sovereign reserve currency not only eliminates the inherent risks of credit-based sovereign currency, but also makes it possible to manage global liquidity. A super-sovereign reserve currency managed by a global institution could be used to both create and control the global liquidity. And when a country's currency is no longer used as the yardstick for global trade and as the benchmark for other currencies, the exchange rate policy of the country would be far more effective in adjusting economic imbalances. This will significantly reduce the risks of a future crisis and enhance crisis management capability.
Like yours truly, the PBoC guv'nor realizes that there are tough obstacles to getting this done. That is, the United States will not let its (waning) hegemony slip without a fight by letting an alternative currency be established as a store of value in providing reserve liquidity as well as a medium of exchange in settling world trade. From the Chinese perspective, broadening its portfolio is certainly desirable:
The reestablishment of a new and widely accepted reserve currency with a stable valuation benchmark may take a long time. The creation of an international currency unit, based on the Keynesian proposal, is a bold initiative that requires extraordinary political vision and courage. In the short run, the international community, particularly the IMF, should at least recognize and face up to the risks resulting from the existing system, conduct regular monitoring and assessment and issue timely early warnings.
Here are the steps Zhou envisions if the SDR is to become a real alternative reserve currency as opposed to its current status as little-held unit of account:
(1) Set up a settlement system between the SDR and other currencies. Therefore, the SDR, which is now only used between governments and international institutions, could become a widely accepted means of payment in international trade and financial transactions.
(2) Actively promote the use of the SDR in international trade, commodities pricing, investment and corporate book-keeping. This will help enhance the role of the SDR, and will effectively reduce the fluctuation of prices of assets denominated in national currencies and related risks.
(3) Create financial assets denominated in the SDR to increase its appeal. The introduction of SDR-denominated securities, which is being studied by the IMF, will be a good start.
(4) Further improve the valuation and allocation of the SDR. The basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies, and the GDP may also be included as a weight. The allocation of the SDR can be shifted from a purely calculation-based system to one backed by real assets, such as a reserve pool, to further boost market confidence in its value.
These are fine words; I hope they translate into action. I just hope that China will be willing to side with LDCs when push comes to shove as the US inevitably objects to reform of the IMF in a way that diminishes its influence over the organization. Remember, it still holds a "veto" due to it having over 15% of SDR holdings that are equivalent to votes at the IMF where an 85% majority is required to push changes through. If China really wants an alternative reserve currency to become a reality, it certainly should be willing to play a larger role in international institutions. It should also be willing to put Uncle Sam on debt rehab despite its outstanding reputation as a debt pusher. I feel chuffed for now; we may finally be getting somewhere. And the UN is nowhere in sight for this proposed solution.

China getting fed up with dollar debasement--who'd have thought of it? Nobody likes being played for a fool. Heck, it only took five or so years and a major financial calamity for China to get the message.
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Olive Oyl Globalization: Stiglitz's UN Populism

♠ Posted by Emmanuel in , at 3/23/2009 01:32:00 AM
Cartoon watchers of all ages are familiar with Popeye damsel in distress Olive Oyl. When in trouble, she calls for Popeye to come to the rescue. To paraphrase her in the context of today's offering, "Woe is me, LDC!" Now, the history books are littered with past efforts at creating meaningful groupings that promote an LDC agenda. Among others, the Non-Aligned Movement, the G-77, and the New International Economic Order have tried to counteract the influence of industrialized countries at important multilateral institutions such as United Nations and the Bretton Woods twins (World Bank and IMF). The reason why you don't hear much about these past efforts is that none have really made a mark on global economic governance.

That's not to stop Joseph Stiglitz, however, from giving it another go. If LDCs are squealing like Olive Oyl during the current crisis, is Stiglitz our Popeye? (I hope he has large forearms.) From the Financial Times comes word of yet another plan to make these institutions more accountable to LDC concerns. Is it 1964 or 2009? See for yourselves:
The Group of 20 should be replaced by a new Global Economic Council, an advisory panel of senior international economists has said. Under the panel’s proposals, the council, which would be a United Nations body, would become the main forum for setting the agenda for worldwide economic and financial policy.

The proposal, made by an 18-member UN commission headed by Joseph Stiglitz, the Nobel-prizewinning economist, will be raised at next week’s expanded G20 summit in London, at which heads of state will debate a global response to the world financial crisis. It is part of a draft 10-point plan put forward by the panel, appointed last October by the 192-member UN General Assembly, to study reform of international financial institutions...

The new UN body, which would be independent of the Security Council in which the main powers hold a veto, would have a membership of 20 to 25, Mr Stiglitz told the FT. The proposal goes to the general assembly this week.

The panel’s plan also proposes a new global reserve system that would provide support to developing countries on a regular basis and would not be subject to veto by industrialised countries that dominate existing international financial institutions, such as the IMF [also see this recent post].

The plan calls for developed countries to set aside 1 per cent of their fiscal stimulus plans, in addition to existing foreign aid budgets, to spend in developing countries. “While the decision on stimulus is national, it should be judged on its global impacts,” the panel says in a draft document.

It also calls on advanced economies to abide by pledges to avoid protectionism “and . .. insure that stimulus packages and recovery programmes do not further distort the economic playing field and further increase global imbalances”. The draft criticises “misguided policy recommendations” by institutions such as the IMF that have prevented developed countries from adopting the counter-cyclical stimulus policies being pursued by the developed countries.

The draft document says that a global response to the financial crisis “must encompass more than the G7 or G8 or G20, but the representatives of the entire planet, from the G192”.

There is much to discuss here but probably little to look forward to in terms of becoming a reality. The UN-phobic William Easterly will have a field day with this globalization-by-committee approach. From my POV, some of these suggestions appear rather impracticable and will fall on deaf ears like in so many times past:

  • The G20 is already weak-kneed as it is; adding another layer of UN bureaucracy to the proceedings is bound to hinder rather than help;
  • The UN already has a General Assembly in addition to a Security Council; why would adding another grouping help matters along? And don't forget UNCTAD, either;
  • Stiglitz proposes a global reserve system to replace that overseen by the IMF, but won't that require setting up an alternative institution to the IMF?;
  • Why would the many industrialized countries already running large fiscal deficits readily be able to fork out 1% of their respective stimulus packages to help LDCs?
  • The G-192 sounds like a recipe for gridlock; if the G-77 was unwieldy, what is this thing?

Bottom line: while I await the final document, Stiglitz's suggestions certainly mirror initiatives past that have fallen by the wayside. Plus, many are recycled from his recent book. That this one is being captained by an American at a tony Ivy League institution certainly does it no favors in terms of legitimacy.

I am perplexed why Stiglitz is keen on portraying LDCs as hapless victims when many now have increased political-economic clout. LDC populism without realism has not, in times past, proven to be a recipe for reform of global economic governance. If Stiglitz is concerned about exacerbating global economic imbalances, the best course of action is not to recycle the "woe is me" approach taken so many times before. Rather, making large LDC funders of US deficits force Uncle Sam to shape up or feel the wrath of reserve sales is the way to go. As I've said, US protectionism may be a way of generating this desired result as offended countries chafe at ridiculous protectionist policies. Sorry Dr. Stiglitz but realpolitik beats Olive Oyl each time out.

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Fight Rejoined Over Soya Export Tax in Argentina

♠ Posted by Emmanuel in , at 3/21/2009 06:01:00 PM
It baffles me how long this has been going on: In May of last year, I posted about Argentina's efforts to keep the local market well-supplied with soybeans as farmers preferred selling to export markets given the prevailing high prices of commodities. Fast-forward nearly a year and things are rather different as soybean prices have fallen markedly alongside those of other commodities (see chart). Plus, a continuing drought is worsening prospects down on the farm. Now Argentinean farmers are unhappy that, despite the fall in soya's price and hence the original justification given by Argentinean President Cristina Fernandez-Kirchner, the export tax remains in place. Worse, a revenue-starved government (attributable to the fall in commodity prices) has just said that it would send tax proceeds to local governments--not a popular move, to say the least. Like before, farmers have blocked streets to stop the transport of soya and mounted roving strikes. From Reuters:
Argentine farmers blocked roads and called an anti-government strike [for a week] on Friday, reigniting a year-long standoff over soy taxes and challenging the president three months before a mid-term vote. The protests erupted a day after ruling party lawmakers refused to debate an opposition-led bill to cut the taxes, further dimming prospects of a quick resolution to a conflict that has weakened President Cristina Fernandez.

Her cash-strapped government is battling to retain some $4.9 billion in tax revenue from soy exports in the run-up to the congressional vote, which is expected in June.
"A great opportunity was lost yesterday," said Mario Llambias, president of the Argentine Rural Confederations, one of the country's four main farming groups, as he called the seven-day freeze on grains and livestock sales from Saturday.

Fernandez further riled farmers in the agricultural powerhouse with an announcement that revenue from the levies would be shared with provincial governments. "We've gone back to the 2008 situation," said Alfredo de Angeli, the outspoken leader of a local FAA branch, who was arrested by military police last year when he blocked the same highway in the eastern province of Entre Rios.

Protesters stopped traffic by parking tractors on several highways in the fertile Pampas region, some burning tires in scenes reminiscent of last year, when blockades caused sporadic food shortages and sent local financial markets tumbling. Friday's protests pushed U.S. soy futures and local livestock prices higher, while the peso and Argentine bonds fell. Mario Balletto, a Citigroup analyst in Chicago, said "seven days will not cause too much excitement but the uncertainty that it could become longer would be supportive" for prices.

Fernandez has refused to lower the tax on soybeans from the current rate of 35 percent, even as global prices have slid 40 percent from last year's record high and a severe drought has slashed corn and wheat production. She defends the levies as a way to share wealth in a country where roughly one in four people lives in poverty.

Soy is Argentina's top crop and income from taxes on soybeans, oil and meal has become more important for the government as the economy slows after years of robust growth...the farming conflict is leading major soy buyers like China to look to the United States and Brazil for supplies, industry analysts said.

The current grains harvest, valued at about $17 billion, is expected to earn the government $5.6 billion in export levies, the vast majority from soy, according to a recent estimate by the Argentine Rural Society.
Aren't Peronist politics supposed to be populist? You don't hear of counterprotests.
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Investment Grade Debt for Libya? Yessiree Bob

♠ Posted by Emmanuel in at 3/21/2009 05:39:00 PM
Picture this: a country whose leader was not so long ago synonymous with terrorist activity is now a near-shining model of economic rectitude, while its historical antagonist the United States is a basket case whose currency the community of nations will soon suggest others flee from. How time change, eh? From MarketWatch:
[Standard & Poor's] assigned Libya A- long-term and A-2 short-term foreign and local currency ratings, citing the strength of its balance sheet. The ratings agency assigned the sovereign rating following a request from Libya's government, said David Beers, global head of sovereign ratings at Standard & Poor's, in a phone interview with MarketWatch.

"I think it's fair to say that their motivation to ask for the rating is in keeping with the broader philosophy of recent economic reforms," Beers said. "The rating is useful in terms of helping the country attract more foreign investment. Unsurprisingly, the focus of investor interest has been overwhelmingly in the oil and gas sector," Beers said. Other sectors that will likely draw investors are banking and tourism, he said.

Located in North Africa, Libya has the largest proven oil reserves in Africa. A member of the Organization of Petroleum Exporting Countries, it also holds vast reserves of natural gas. Its leader, Moammar Gadhafi, has been in power since 1969...

S&P assigned a stable outlook on Libya's ratings. "The ratings on Libya are supported primarily by what we consider is one of the strongest balance sheets among A-rated sovereigns, comprising substantial public assets and negligible debt, relatively low financial contingent liabilities, and the solid medium-term growth prospects of the country's energy sector," said Standard & Poor's credit analyst Ben Faulks in a statement...

S&P expects the sharp fall in oil prices and OPEC-driven cuts in production to cause a significant contraction of Libya's real and nominal gross domestic product this year. However, due to its strong balance sheet, Libya is well-equipped to confront likely fiscal and current account deficits and to moderate what could otherwise be a significant shock to the economy, S&P said.

The country's medium-term growth prospects are "promising," and international oil companies have demonstrated great interest in Libya, attracted by low production costs and the fact that some 75% of the country remains unexplored, the agency said. Infrastructure is underdeveloped following years of international isolation.

"The main constraint on the ratings on Libya is our belief that decision-making is more centralized and the political process more complex than in many A-rated peers, leading to less predictability in policy-making," S&P said.
At this point, Moammar could teach Barack a thing or two--especially about socialism.
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North-South Divide: UN To Say "Let's Ditch the $"

♠ Posted by Emmanuel in ,, at 3/20/2009 01:13:00 AM
It's times like this when you should be glad about my semi-fastidious approach to classic IPE problematiques. Today, we return to the never-ending issue of a North-South divide between industrialized and developing countries concerning reserve currencies. It is no secret that the US is resorting to all sorts of dollar molestation tactics to buoy its economy. The US government will print something on the order of $2 trillion in IOUs to pay for a $787 billion stimulus package and a plan to refinance foreclosed mortgages (many of which will foreclose again anyway). Plus, you have news that the Fed plans to add $300B or so more to its balance sheet by purchasing long-dated Treasuries to try and lower consumer borrowing costs. In effect, the US government is cranking the printing press not only to mint its IOUs but also to allow the Fed to buy up Treasuries that America herself issued. What a plan.

These actions have not endeared the US to LDCs, just as the US running chronic external deficits didn't at the turn of the 1970s culminating in the "Nixon Shock" demise of the dollar-gold standard. LDC unhappiness stems from the US being unconcerned as the value of the world's standard reserve currency, the dollar, sinks. In response to dollar molestation, necessary commodities become dear, swelling many LDCs' import bills--especially those of oil importers. Many have long been concerned about America's willingness to abuse this privilege of issuing dollars, including John Maynard Keynes who suggested the creation of the bancor. Postwar Britain not being the dominant power at the Bretton Woods conference, this idea was quickly shelved by the US, which naturally favored a multilateral system built on American hegemony.

Hence, special drawing rights (SDRs) established during the turn of the seventies did not really allay LDCs fears; it has never really fulfilled the role of an alternative reserve denomination as SDR holdings remain minuscule among various countries' reserve holdings. Given current global conditions, however, LDCs are once again clamoring for a genuine dollar alternative. From Reuters comes this potential bombshell:
A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar.

Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket. [He] said the recommendation would be one of a number delivered to the United Nations on March 25 by the U.N. Commission of Experts on International Financial Reform. "It is a good moment to move to a shared reserve currency," he said.

Central banks hold their reserves in a variety of currencies and gold, but the dollar has dominated as the most convincing store of value -- though its rate has wavered in recent years as the United States ran up huge twin budget and external deficits...

Persaud said that the United States was concerned that holding the reserve currency made it impossible to run policy, while the rest of world was also unhappy with the generally declining dollar. "There is a moment that can be grasped for change," he said. "Today the Americans complain that when the world wants to save, it means a deficit. A shared (reserve) would reduce the possibility of global imbalances."

Persaud said the panel had been looking at using something like an expanded Special Drawing Right, originally created by the International Monetary Fund in 1969 but now used mainly as an accounting unit within similar organizations.
So there you have it. After all this time, the question of an alternative reserve currency remains unresolved as old ideas are being resurrected. Actually, this proposal mirrors a more recent one by the historically LDC-friendly UN Conference for Trade and Development (UNCTAD) to reduce the asymmetries in the world economy where industrialized countries able to print reserve currencies can splurge while LDCs are forced to save [see my recent post on this point and also this UNCTAD summary]:
[UNCTAD Chief Macroeconomist Heiner Flassbeck] said it was essential to examine this problem from a broader perspective - namely that under the current system, some countries were not allowed to “print unlimited amounts of money” or run large budget deficits without causing their currency to “fall down a very deep hole.” This represented a fundamental asymmetry in the global economy that was in no one’s interest. In effect, countries who are the victims of currency speculation, or “carry-trade” (portfolio investments based on borrowing in low-yielding currencies and investing in high-yielding ones) are forced to take “pro-cyclical” measures (such as interest rate hikes or public budget cuts or freezes) that aggravate the crisis in the real economy in order to reassure international currency speculators. This perverse phenomenon underlined the importance of UNCTAD’s proposal to develop a multilateral framework for an automatic stabilization of real exchange rates that would defeat the purpose of any speculative attack on a currency. This would enable all countries to regain the policy space needed to act in the interest of the real economy and avoid “beggar-thy-neighbour” policies or “devaluation wars” reminiscent of the 1930s...

Such a global reserve currency was part of the original proposals of John Maynard Keynes at the 1944 United Nations Bretton Woods Conference (which he had termed the “bancor”), but it was resisted by the United States at the time. Instead, the IMF constitution enables it to issue an artificial liquidity called “Special Drawing Rights” (SDRs), but its emission has been blocked by the United States’ de facto veto at the IMF and suffers from a number of limitations compared to Keynes’ original proposal, including the IMF’s governance structure. Nobel Prize laureate Joseph Stiglitz, who also chairs the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System, has repeatedly emphasized that the need for a new global reserve system which would be more stable than the US dollar has become more dire today: it is an idea “whose time may have finally come.”

In a nutshell, the system would work as follows: when a country faces a devaluation attack, the monetary authorities of the revaluing currency would automatically stave off the attack by a symmetrical intervention to stop the “undershooting” with its own currency, which is available in unlimited amounts: it can be printed. Nominal exchange rate changes would be readjusted periodically by governments, not markets - which contrary to neo-classical theory have empirically been proven not to be able to get “the price right.” These adjustments would be based on the objective criterion of changes in Purchasing Power Parity, or “inflation differentials.” Unlike the Post-World War II Bretton Woods system of fixed exchange rates (which was based on the US dollar and collapsed in 1970s), the value of each currency would be anchored to a new artificial global currency based on a basket of currency values, like the European “ECU” was used in Europe prior to Monetary Union.
One hopes this new proposal does not fall on deaf ears like both times before--at the Bretton Woods Conference and during the demise of the dollar-gold standard. Certainly, the US is much weaker at this point and cannot exercise as much hegemonic power as way back when. I, however, think the remedy to the US holding the rest of the world hostage to "quantitative easing" (dollar molestation) is for China to show solidarity with third world concerns and stop buoying the dollar. I wish the UN the best but do not pitch my hopes too high.
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The Official Anthem of Protectionist Mania 2009

♠ Posted by Emmanuel in , at 3/19/2009 08:45:00 AM

I'm strapped for time but, in light of this place becoming the International Protectionist Economy Zone, here's my choice for this year's new official song. This one is off Jamaican disco goddess Grace Jones' classic album from 1980, Warm Leatherette. I was inspired to look for this song appropriately entitled "Bulls--t" on YouTube and, sure enough, here it is. I suggest they play it at the next G-20 meeting before proceedings get underway:

And if I wander down the wrong road,
It's alright baby, just let me go,
If I get tired of all those a--holes,
It's alright cause' I want them to know.

I'm sick and tired of all this bulls--t,
Rough s--t, same s--t

Juice protectionism, mining protectionism, trucking protectionism..I really am tired of these never-ending variations on a pathetic theme.
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