Mar

23

 When the Clintons came to power they pushed hard for socialized medicine via national health care. And that helped bring Republicans to power in Congress two years later. When the President is a Democrat and Congress is controlled by Republicans, that seems the best combination (short of having both controlled by Jeffersonians).The new trillion-dollar Fed infusion is standard monetarist policy, I think. A Forbes columnist recommended it a month ago. The MV in the monetary equation means that when velocity slows down dramatically, which it did, money supply drops dramatically.

So the Fed pumps in a trillion to rebalance the equation. This at least is better than Congress spending another trillion on pork-barrel infrastructure and green-energy projects.I would prefer a private currency system, or a gold-standard, but I don't see the Fed move as a disaster. Better the Fed try to deal with monetary problems than Congress and the Administration. Of course when velocity picks up, the Fed has to pull all that cash and credit back out.

Private firms and individuals trying to cope with heavy debt loads sell assets. The Federal Government has a vast array of assets to sell, from commercial lands in the west, to off-shore acreage, to buildings, parks, freeways, airports, unneeded military bases, etc. Moving these mismanaged and underutilized assets from opaque bureaucratic ownership to transparent publicly-traded firms (or to non-profits in the case of parks and wilderness areas), is an attractive option for soaking up dollars when the time comes, and shrink the physical size of the Federal Government in the process.

Last week's newspapers headlined the news that $11 trillion in American wealth "vanished." The articles complained that economy and American wealth is back where it was in 2004. But in 2004 Americans were the most prosperous people in the history of the world, with the highest living standards, most disposable income, cleanest environment, best working conditions, biggest houses, safest cars, and on and on.

The U.S. economy was heavily regulated then, and now it is more heavily regulated. Americans were heavily taxed then, with the upper 1/10, 1/5 and 1/3 of taxpayers paying way more of the tax bill than the bottom 50% (and getting little in the way of services besides traffic jams, foreign wars, and tax and regulatory confusion). Now upper-income Americans will face higher tax rates. This will likely lead to lower tax revenue for the government, as it has in the past, which could again lead to reducing tax rates.

China and India are in terrific shape compared to 2004 or to any year before that. "Millions are unemployed" scream the headlines. But what were these folks doing in 2004? How many were planting rice by hand in their villages. James Fallows article in the April Atlantic Monthly ("China's Way Forward") makes clear that the average Chinese worker is well aware of how much better off they are than just a few years ago.

Wealth has increased dramatically in China and India, and billions upon billions of dollars worth of incredibly productive machinery has been deployed across their economies for hundreds of millions of moderately-skilled workers. Skill levels are rising driving productivity up in places where production has stagnated for centuries. People who are used to working 60 hours a week with wood ploughs and old shovels now work with modern machinery. Farmers are increasing productivity (where they have property rights and access to markets), and have cell phones to track prices and nearby markets. This productivity train has been gathering momentum for over a decade in India and over two decades in China. Even without an additional capital and consumption push from the U.S., India and China are adjusting and coasting forward, lifting living standards for hundreds of millions more.

In Eastern Europe, Southeast Asia, and Chile, Brazil, Peru, and Mexico in Latin America, market reforms and new machinery lift productivity and living standards. The dramatic drop in U.S imports of clothes and other goods (our closets and kitchens were stuffed full anyway), will encourage firms to market their goods and services across their own economies, where vast numbers are reaching productivity and wage levels that allow them to enjoy living standards the U.S. and Western Europe enjoyed a century ago.

So… I am optimistic. Had the current Administration come to power with a strong and growing economy, I don't think anything would have stopped the rush to national health care, green taxes via cap and trade, and pervasive new government intervention across the economy. Now at least we have a chance of avoiding these long-term disasters.


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7 Comments so far

  1. ld on March 23, 2009 10:04 am

    Would you mind saying a few more words about “I would prefer a private currency system”? What exactly did you have in mind and why would you prefer that?

  2. Gregory Rehmke on March 23, 2009 12:35 pm

    On private currencies, I recommend articles by Lawrence White, and his monetary textbook (The Theory of Monetary Institutions, which we used in a San Jose State Univ. graduate class on monetary theory, along with a mainstream text).

    Here is an article by Larry and George Selgin on private banking: http://www.econlib.org/library/Features/feature3.html

    Excerpt: “Nationalization of currency is largely taken for granted today, but it shouldn’t be. Adam Smith praised private currency for the benefits it had brought to his native Scotland. Most economists would agree that a legally enforced government monopoly is generally an inefficient way to produce private goods and services. The post office is a prime example; other examples range from state-owned plantations to national railroads. Currency is no exception to the rule. As with other nationalized products, quality is lower than it would be under private competition. The inefficiencies associated with government monopoly in currency are especially large in developing countries, where the reliability of the exchange rate (an important aspect of currency quality) is often quite low.”

    George’s recent book is “Good Money”
    http://www.independent.org/store/book_detail.asp?bookID=75

  3. ld on March 23, 2009 2:26 pm

    Given a choice between American Express Gift/Traveler’s checks and US dollars, I choose US dollars. I struggle to imagine the magnitude of the current crisis if Countrywide had been able to issue currency. The point hidden between the various sentences in your post is very vast in terms of possible impact and I’d do it no justice by discussing in comments here. It brings forward the question of time (implementers’ lifetime is a single generation, with the impact of the implementation affecting many generations).

  4. David Riffer on March 23, 2009 8:04 pm

    Private currency systems have no future because, who would give up a monopoly on printing money? And in this case the people with the monopoly have the ability to ensure that they never give it up. This alone guarantees that private currency systems won’t displace fiat money any time in the near future, regardless of the merits.

    That said, almost everything in this post is a powerful argument that once the volatility of money eventually corrects, non-trivial inflation is assured. Has anybody even proposed any way to meaningfully reduce the money supply, when it becomes necessary? Because there certainly isn’t any reason to believe that merely raising short term interest rates as much as politically feasible will be sufficient. And we’ve seen how well not planning ahead has worked ..

  5. douglas roberts dimick on March 24, 2009 10:01 am

    [THIS IS THE CORRECT VERSION; PRIOR ONE HAS TYPOS. SORRY.]

    Privatize This…

    Just before leaving office, Clinton repealed Glass-Steagall.

    Privatization of commercial and investment banking then transitioned into a purist state a la Bush’s nonregulatory, leave-the-private-sector-alone mantra (not so refashioned from the Reagan Era).

    That (combination and sequence) juxtaposition is how we arrived here. The point?

    That $11t of evaporated wealth was not value representing a fundamental quantification of capital appreciation. Remember funny money? Cheap money? That was the $11t.

    That wealth was not earned or created in correlation to productivity. It was projected by a bunch of investment banks swapping paper (i.e., toxic derivatives) among themselves.

    Where did they get the underlying value? From the commercial banks.

    How could they do it to such intoxicated levels of leverage in a mere ten years? Ten years absent Glass-Steagall with only GOD (Greenspan on Deregulation) prostilatizing In Citi We Trust among fellow Rubinites.

    In January 2009, Rubin was named by Marketwatch as one of the “10 most unethical people in business” ( [21] http://en.wikipedia.org/wiki/Robert_Rubin ).

    Whew, glad we know now, seeing how the Pres during them years forgot to tell us.

    Compared to Clinton’s Blowup Grandmaster, Victor may be seen as history shall so record, I maintain: a scientist who endeavors to discover the unknown to be found in electronic exchange markets of financial instruments.

    Granted, with such experimentation, there will be the occurrence of complete, terminal failure. Those who “voluntarily” opt to invest in such a fund know the risk(s) with hedge fund participation – lawyers make em sign a paper full of small print so stating.

    To wit: attendant with the probability of spectacular gain is the probability of spectacular loss. It is nature. It is physics – as evinced by my Theory of Quantitative Relativity, at least in beta testing to date.

    But the taxpayers were not so notified of the Clinton, Greenspan, Rubin, Bush et al scheme for global alignment, including the risks attendant with post-GS (or pre-Great Depression) markets. Thus, tax payer participation then was involuntary.

    Now, the ongoing bailout is being presented as being compulsorily. Great, having privatized the pillaging of the commercial banking system, then we national the corresponding liabilities.

    The systematics of that ten-year-plus fraud (derivatives bailout) was purposely complex to avoid detection and regulation. Enough said…

    Privatization arguments may be further eroded by statements such as “China and India are in terrific shape compared to 2004” and “Wealth has increased dramatically in China and India.”

    I have been teaching, consulting, and researching in China for the past three years as of this month. I have studied India to analyze and distinguish inbound and outbound aspects of the Chinese emergence.

    Whereas Japan is a bank-centered system, China is a state-centered system with predominant command economics. India is a (social/religious) caste-centered system with predominant traditional/market economics.

    China’s Openness and Reform Policy was a nonstarter until we decided to award the Beijing Games in 2001. So sure, there have been improvements since 2004 (compared to bicycle congested streets before). That is a good thing – for some.

    World Bank said that 400m Chinese were lifted out of poverty in the past 10 years. Was this due to privatization?

    Take a look at those past eight years of unfettered inflows of FDI into China absent NGO monitoring – which we are now attempting to correct and not do again in Eastern Europe. The lesson?

    I have a law school classmate who was in compliance for an Eastern European NGO. She said that, without an independent judiciary with rule of law and a free press, privatization churned into a corrupt privatization of the state itself.

    Note the parallels with bureaucratic sprawl replacing SOE (state owned enterprise) devolution in China. For example, I was in Shenzhen this past summer at the onset of the export floor collapse. Some 15,000 factories closed in one month.

    Right, 15,000 boards of directors just happened to resolve to cease operations then? That is the private sector at work?

    What we do know is that 200m of the 400m lifted out of poverty just got dumped back into it. But government officials keep their under-the-table stash accumulated during those fat years.

    Over here, Rubin pulled down what at Citi — $136m in 10 years – after the Clinton years?

    That is privatization?

    The last of the Chinese “Big Four” banks announced it “completed” privatization months ago.

    How do you define privatization?

    Here, that means that 50% is owned by the Ministry of Finance. 49% is owned by Communist Party members, who own the Ministry of Finance a la the one-and-only-party owning the State. 1% is owned by (I kid you not, this is the registered name…) ABC Company – usually constituted with key party minions.

    Note that all four banks may still considered technically bankrupt. I say considered as reporting and transparency are still at the “Chinese tea leaves” level.

    The recent $500b stimulus announced here goes to those banks and also to a stack of SOE’s, who are also technically bankrupt. The money keeps the system afloat for I don’t know how long.

    Heard much about NPLs here lately? Of course not, because they are ramping up, so not exactly copasetic with the “Happy Every Day” Theme of the Thee CCP Party Optimist Society.

    Of course, as there is not a free press, there is no disclosure or transparency… only what the government says… it owns the media as well.

    My business book hits 300 bookstores here in China next week – unremarkable as it is a first try and was censored in the edit (so it could be published, period).

    My point here in response to the article is not to be adversarial. I merely suggest that, given globalization of national and regional economies, we might consider that different parts of the world have different notions of what “privatization” means in terms of both government policy and commercial applications.

    There are 1.4b people here in China – the result of a government privatization of demographic militarism to prepare for a war with us foreign devils then invading Korea. That line is the official story; from a political science perspective, my take is that Mao’s reforms, except for health care, were failing, so they had to cook up something for the 600m to do. Having eight member families would keep people at home for a while instead of on the street causing not-so-harmonic uprisings.

    Again, if Chinese people think that the current system is cool, then let it be, let it be, let it be, let it be…

    Again, I only observe here (and in my book before censorship) is that human history is quite clear on the subject, to include China’s 14 dynasties over 5,000 years (or an average about 350 years per ruling dictatorship): economic emergence here and assimilation with free-world economies requires rule of law to ensure transparency with a free press, and that requires government – not privatization.

    The US did in 150 years what many countries, like China, could and still have not because of that lack of privatization. Granted.

    Caveat. Our first train wreck was due to a rules-based system operating without codification of social-economic norms, whereby due process could be institutionalized, ensuring fairness while minimizing legal arbitrariness and economic injustice. This current train wreck is occurring due to the repeal of that rules-based paradigm, supposedly for a new rules-based “setup” – globalization.

    Funny, I do not remember anyone asking me about whether Glass-Steagall should be repealed. I don’t remember a whole lot of public debate on the subject – seems like a top-down phenomenon.

    I read somewhere that the Federal Reserve System was actually passed to become law in Congress during some odd hour and in some odd way as otherwise the bill would have failed — again.

    If asked, but no one does, I would tender that an argument may now be made that Congress is pretty well privatized relative to the Founding Father’s intent as set forth in the Federalist Papers. Have you read the federal campaign election laws?

    I tried – having graduated at the bottom third of my law school class, I guess it is just me. Still, they’re called public laws, so one would think that a member of the public should be able to read and understand em if anyone expects us to follow them.

    In closing, consider a tangential issue, from a humanist perspective – just for kicks. I remember somewhere that history judges a society by how it treats is poorest, most unfortunate members.

    Wendy Pan Pan. She is a 12 year old girl from Hubei Province. She is dying form Leukemia – I say that here not elsewhere as she does not read this site. You can link to her blog and see her pic at DRDimick.com — still in development…

    How did she get Leukemia living in China?

    Privatization of manufacturing? Privatization of environmental monitoring? Privatization of water and air?

    Some 25 years ago, I experienced the loss of 13 year old boy, my Nanny’s grandson, who died from Leukemia.

    How did he get it living in Bangor, Maine?

    Privatization of manufacturing? Privatization of environmental monitoring? Privatization of water and air?

    Interestingly, here in China, medicine is one area that the Communist State did privatize. Well, in a way, kind of, well… if it costs money, then private people pay; if it pays money, then the state owns it.

    Pan Pan’s bone marrow transplant will cost 300,000 RMB. The state offers 5,000. Insurance repays a year later some 40,000.

    Right, we are talking about a state owned hospital charging 300,000 to help save the life of a family who’s net worth is (after borrowing for chemotherapy) -60,000 RMB.

    If the family was of Communist Party membership, there would be funds available or a negotiated charge.

    Oh, is the fact that a different set of laws are applied by the state for Communist Party members than with the other 95% of the Chinese people so indicate privatization of the state sovereign?

    If so, then it seems we have privatization of the monetary system in the US to a functional degree. If I go bankrupt, the government does not bail me out with taxpayer funds. But that is not the case for AIG and the other mismanaged banks.

    Such a paradigm indicates private sector, market selected transactions, yes?

    You can say such is not a monetary event, I suppose.

    Clinton did not have sex with “that woman”, I suppose.

    Bush was against nation building before he became president, or at least I think he supposed so at that time.

    And Greenspan said that he made a mistake, and both he and I have no doubt about it.

    Happens all the time… Here we got 5,000 years of privatized governance to prove it.

    dr

  6. Gregory Rehmke on March 24, 2009 12:26 pm

    Well, a few comments on this long comment… I remember years ago a Chinese economist arguing that what we call privatizing was actually making firms public. That is government enterprises are usually controlled by bureaucrats as their private domain. When sold to stockholders, these enterprises are made public. So the usual reporting of privatization is backwards. I just watched Power Trip, the documentary on AEC purchasing the government power system in Georgia after the fall of communism. The story is much the same around the world. Government firms, SOEs, benefit bureaucrats and politically-connected private firms.

    For China’s stunning economic growth I recommend William Overholt’s great book, “The Rise of China”. It is dated now, but it shows the overseas Chinese played the major role with tens of thousands of small investments, rather than the top-down investments via Beijing that are usually profiled in documentaries.

    The claim that “200m of the 400m lifted out of poverty just got dumped back into it” perhaps turns on what we define as poverty. Are these newly poor now eating meat just once a month, as they used to a decade or two ago. Or twice a week? I agree that the Chinese local, regional and central governments intervene massively in the economy and distort private enterprise across China. But ten and twenty years ago, the Chinese government held much more of the economy in thrall with giant money-losing state-owned enterprises.

    Rules evolve in market economies, and the Chinese economy has had its own unique circumstances for developing rules for private property and contracts under an umbrella of practical “communism with Chinese characteristics” sayings from Deng Xiaoping.

    We can hope the differential between how nimbly private firms in China and India respond to the downturn, compared to cumbersome government owned and partially owned firms, will push these economies further toward market-reforms and non-government ownership of economic resources.

  7. douglas roberts dimick on March 25, 2009 10:33 am

    GR, agreed… we can hope.

    That implied evolution, though, would be a contra-indication of both the current national and (Communist) party constitutions. In both documents, you might note whom the ongoing revolution is against (as in today a la successive five-year revolutionary plans).

    Noted for the record: “It is glorious to be rich.” Right, so long as you belong to the right party.

    US/EU alliance could advance true hope (not just that of empty words, being political dogma) by instituting “mirror policy” applications when dealing with Beijing — forget the Chinese women’s gym team (age) issue — whereby there is reciprocity with consequence for noncompliance. This recommendation is designed to support both those “nimbly private firms” and embrace “overseas Chinese” wisdom.

    That said, the repeated references to China of prior decades (be it thirty years ago or pre-Olympic-Award) operate in a prism-like segmentation of political and social-economic contexts. SOE’s are still this economy. Government segmentation has been replaced by party instillation within any relevant or significant “private” firm.

    Living here reminds me how “the devil is in the details.” An example is how the economy is structured in paradigm-like symmetry with the education system — another book.

    In short, what Reagan understood that Bush (I/II), Clinton, and seemingly now Obama failed to realize is that privatization a la civil and economic justice (or liberty or freedom) is based on one word: trust.

    That is not here. The USSR collapsed because it did not have it either.

    Hitler’s Germany, Stalin’s Russian federation, Mao’s collectivization: these systems are fear (not hope) based. Within these systems, trust is a dangerous word – ranking just after religion (or faith) on the Top 10 Not Wanted List.

    Thus, unless one is an accountant, economist, or financier, the use of “stunning” here is misleading – not just referring to the 200m just added to the 800m. Consider, in a relative context, what constitutes China, so characterized as an emerging economy, being one of the G-20:

    Infuse globs of free money (or FDI as lack of rule of law precludes recourse) into a top-down, monolithic “political” machine. Sure you generate 12% growth rates – as long as there are corresponding inflows of additional capital investiture for each successive period.

    Once the money stops, well, you are beginning to see what began over 19 months ago – when I started to track HR and FDI reversal (out) trending. Since, the government and those with aligned interests have been able to patch and fill, that is pre-October Surprise – just like Madoff.

    The walls now begin to close in. And, as true with Richard III, the Communists are beginning to look for “a horse, a horse…” Why do you think Beijing is so nervous about their US holdings? Consider the political and economic leverage that Washington increasingly possesses over them with both the devaluing Dollar and an international flight to US securitization.

    Why is that, by the way, given that devaluation and Wall Street gone bust?

    Approximately 84% of all Forex (currency pair) exchanges have the USD on one side of the transaction. The Forex is the world’s largest electronic exchange market of financial instruments; $4trillion (US) per day, which has doubled since 2004.

    The RMB? Ah, a restricted currency, not even on the list.

    The Communists make a big deal here about their $2t foreign capital reserves — not actually after repayment and devaluation. Twice their holding’s amount trade every day on the Forex.

    Still, Jim Rogers says that it (USD) is a “flawed currency.” Again, as with characterizing China’s reported economic growth rates as having been “stunning” until recently, perhaps both characterizations are credible from a stochastic perspective.

    As for defining poverty, stop by and we will go visit my adopted Chinese brother at our hometown outside Wuhan. It’s not so relative as was made to seem either in the Little Red Book here or among the assorted TV series, books (dated or otherwise), and government approved web sites.

    dr

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