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The Natural Bottom 不能承受之轻 / 謝國忠
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谢国忠搜狐博客 http://xieguozhong.blog.sohu.com/
The hyped G-20 Summit in Washington disappointed. It removed the last hope for a coordinated global approach to handling the financial and economic crisis that is haunting the global economy. The result speaks volumes about the current crop of leaders around the world and the antiquated power structure that governs the global economy. The rapid contraction of the global economy will likely continue into the first quarter of 2009. The second quarter of 2009 may still see some contraction. The global economy may stabilize in the third quarter of 2009, but battered and directionless.
First, I have a few good things to say about the Summit. By bringing the largest and wealthiest emerging economies, the world is recognizing that any future structure for governing the global economy must include them. The G-7 has looked decidedly out of date during the Crisis. They are supposed to represent the OECD or developed block that still account for 70% of the global economy. But this group accounts for less growth than developing countries in the past five years in real and nominal terms. Equally important, emerging economies hold most of the foreign exchange reserves. How to deploy the money would be the key to solving this crisis. The Summit is the beginning of ditching G-7. What to replace it hasn't jelled.
G-20 looks too big to be effective in making decisions. It should be cut down by half. From the OECD side, the US, the UK, France, Germany, and Japan can represent the block effectively. From the developing economy block, the four BRIC countries plus Saudi Arabia can represent it effectively. Saudi Arabia can represent the interest of OPEC countries. France and Germany can represent the euro-zone. G-10 may be small enough for effective decision making. However, any effective global body for decision making would come too late for tackling the current crisis.
Second, the Summit gave verbal commitments to keeping national borders open to trade and investment. This is reassuring that the Smoot-Hawley Tariff Act of the 1930s would not resurface to cause another Great Depression. Knowing what happened seven decades ago, the big economies like the US, Europe, Japan, and China are unlikely to repeat the same mistakes. Further, the role of multinationals has changed the political calculation over free trade. Seventy years ago, the locations of production and ownership were mostly identical. Hence, both rich and poor benefited initially from blocking imports. As others retaliate, everyone eventually became worse off. Most trade in the world is between emerging and developed economies done by multinationals based in the developed economies. Blocking imports would immediately hurt capital in rich countries. Capital and labor wouldn't agree on protectionism in developed countries even not taking into consideration of retaliation by other countries.
The verbal commitments, however, don't rule out isolated protectionist measures that aim mostly at China. Roughly half of the anti-dumping measures in the world are aimed at China. The US just imposed additional safety requirements on children's products from China, and the EU 60% tariff on candles and 50% tariff on non-alloy steel wire products from China. These measures happened at the same time as the G-20 promised to maintain free trade. Hopefully, these measures don't signify a new direction contrary to the G-20 statement.
Despite the positive developments, the Summit largely failed to satisfy market expectations. On the crucial issue of stabilizing the global economy, it failed to agree on a coordinated program on fiscal stimulus. Essentially, each country is left to consider its best option. The benefit from fiscal stimulus in the era of globalization can leak out through trade. For a small open economy, fiscal stimulus doesn't work at all. For large economies like China and the US most of the benefits from fiscal stimulus can stay at home. When each economy decides on how much to stimulate, it will do less than optimal as the benefits don't all stay at home. When the global economy is contracting like now, the leakage from one's fiscal stimulus is very large. Hence, few economies are incentivized to stimulate. What works is for the global community to coordinate their stimulus. Unfortunately, the G-20 couldn't do it.
In contrast, monetary stimulus has a smaller tendency to leak out. Cutting interest rate tends to weaken one's currency, which protects the benefit from monetary stimulus at home. The main reason that most countries rely on monetary stimulus is that they are already running large fiscal deficits and don't want to encounter political resistance for more debt issuance. Monetary stimulus seems to incur no cost at first glance. As I have argued in this page before. Cutting interest rates doesn't stimulate demand, as asset deflation has destroyed the equity base for households or businesses to borrow. It merely makes it easier for banks to carry bad assets through lower carrying costs, lessening the pressure for selling bad assets and stretching the adjustment process. The negative effects of monetary stimulus may not be immediate but can surface in future. The bubbles under the Greenspan years originate from his penchant for monetary stimulus. The consequences are ravaging the global economy today.
The current wave of monetary stimulus lays the ground for inflation in the coming years, I believe. The deflationary effects from the asset deflation are temporary. They shift the demand curve downwards and decrease inflationary pressure. However, as businesses cut production in response to lower profitability, the demand weakness is no longer deflationary. The increased money supplies that are temporarily hoarded within banks could release through unexpected channels. Another wave of commodity inflation or wage increase through labor union demand could release the inflationary impact of the monetary growth.
A better and more equitable way to print money is to distribute cash among people evenly. Some households and businesses borrowed too much during the bubble. There are three ways out: (1) working it off overtime like in Japan, (2) bankruptcies like the US in 1930s, and (3) inflation like Germany in 1920s. The United States has not thought through which way it is going. It will not follow Japan's path. I don't think Americans will stick to their mortgages under a negative equity situation. It is not American culture. It would be either bankruptcy or inflation. The Fed is staving off bankruptcies by bailing out banks and increasingly non-financial businesses. So it is heading to an inflation solution.
In the 1920s German businesses took on too much debt during the First World War. They pushed its central bank towards an inflation solution, which Keynes erroneously blamed on the payments to the World War I victors. The chaotic process, probably on purpose to hide the central bank's true intentions, led to hyperinflation. The resulting chaos paved the way for the NAZI party to rise to power. In contrast, the US's willingness to accept bankruptcies pushed the country towards institution building, which laid the foundation for a gigantic US economy and its superpower status. History is not kind to the inflation approach.
For the inflation approach to work, it needs to be transparent and equitable. A central bank should announce how much money it prints and distributes it evenly among the population. The money growth shifts up inflation expectation immediately. All the prices of goods and services and wages will likely move up quickly to reflect the new reality. The real debt burden falls in line with the inflation. If the central bank is credible on its printing target, inflation will slow quickly after the initially spurt.
I wouldn't count on such a rational approach to debt write-off. Politics won't allow it. Instead, all the central banks in the world will cut interest rates and, as interest rates are close to zero, accept low quality assets for lending to banks, similar to what the Bank of Japan did. The inflationary impact of the monetary growth would be temporarily suppressed by weak demand and banks' inability to lend. When the banks can lend again, inflation will surge.
The leadership failure that is so apparent now all over the world has a generational twist to it. The baby boomers that were born after World War II pretty much run all the major economies in the world in governments and big companies. They have lived during extraordinary prosperity. The past recessions, even the stagflation during the 1970s, were quite mild by historical standards. In particular, the past two decades since the Berlin Wall fell were extraordinarily prosperous. The leaders that rose during this period were all very optimistic. Unfortunately, optimistic people are not the smartest people. Indeed, optimistic people are usually not very smart. But they rise to the top during prolonged prosperity that rewards optimism. When the catastrophe arrives, they are not equipped to handle it. As the crisis discredits them, a new generation of leaders, hopefully smarter, will rise to the top, and the right decisions are made. Hence, the solution to this crisis may require a leadership change. The US took the first step. Others may follow over the next 12-18 months. The political process suggests that the solution to the crisis will take time.
The saddest thing about the Summit was how France and Japan dominated the limelight. The former championed a global super regulator. The later doled out $100 billion for the IMF. France and Japan are great countries with wonderful cultures. But, they represent the past, not the future. Their tendencies are to enforce equal outcome rather than opportunity. China and the US are much more in tone with the future. The United States is not strong enough to run the world on its own. An alliance between China and the US could. Unfortunately, neither country is embracing the idea.
What will happen and what should happen are usually quite different. I have mentioned three elements on what would likely unfold on policy front: (1) cutting interest rates too much and degrading central bank balance sheets, (2) stimulating fiscally too little, and (3) political changes over next 12-18 months. On the economic front, the rapid contraction of the global economy will continue into the first quarter of 2009. The second quarter of 2009 will probably see much slower contraction. Stability may return by the third quarter of 2009. While economic stability may return in the foreseeable future, meaningful growth is not visible yet. The growth driver for the global economy-the US's consumption and China's factory building is unhinged and can't be put together. The world will struggle to find a new growth engine.
Financial markets will continue to fluctuate wildly over the next three months. When one falls off a cliff, it is most frightening during the fall. One kicks, screams, and fantasizes the pain when hitting the ground. When one hits the ground, it may not be as bad as imagined. It could be a few broken ribs or a concussion. Financial markets are now in the falling mode. In the first half of 2009, when the global contraction slows or stops, the markets will probably calm down. Bottoming, however, is different from the beginning of a bull market. Only a new growth cycle can start a new bull market.
The dollar and government bonds have performed well during the recent turmoil. The flight to safe havens has supported both. The unwinding of speculative positions in the emerging economies and commodities has further supported the dollar. The dollar has been a funding currency for such positions. The unwinding increases demand for the dollar. However, the factors that support both asset classes are technical and temporary. Fundamentals are not good for either. Some argue that Japanese yen performed very well after its bubble burst in early 1990s and the dollar could follow the same path. The comparison doesn't work. Japan's bubble was funded by local capital. When it burst, domestic demand decreased and trade surplus bloomed. Without significant domestic demand for foreign assets, demand for yen increased with asset deflation. Yen only came down when foreigners borrowed yen to speculate in other assets.
The US's bubble was funded by foreign capital. As the bubble bursts, foreign demand for the US assets will decline. The bursting bubble decreases the US domestic demand and, hence, the need for foreign capital. But, the US is ramping up fiscal stimulus much quicker than Japan, which offsets the demand reduction from asset deflation. The position for the dollar now is considerably worse than for yen fifteen years ago. The supply of foreign capital will probably decline quicker than its need for it. As other economies engage in fiscal stimulus, their surplus capital will drop. The dollar may continue to appreciate in the next two to three months. It may weaken sharply afterwards when the carry trades are all unwound.
Government bonds may be another bubble that will burst soon. Even though many analysts are talking about deflation, inflation readings in the US, the UK, and Europe are still quite high. Inflation is a lagging variable and could drop further from here. Still, the high prices for government bonds cannot be justified on the likely inflation scenario in the next few years. Further, fiscal stimulus will increase the supplies of government bonds dramatically in the coming year. Globally, the increase could be over $3-4 trillion. Until growth comes back, the increased supply may remain. Bonds could slip into a big bear market in 2009 like stocks in 2008.
I remain positive on gold and energy. While the global economy is contracting rapidly, energy prices are undershooting. The longer term story for energy remains positive. China and India's development will greatly increase energy demand for the next decade. The supplies, especially oil, won't be able to keep up. All the big oil companies report that their major production fields are declining in yield. The positive story for energy will change when nuclear power has grown sufficiently to replace fossil fuel. That will probably take two decades or longer.
Gold is a substitute for currency. As central banks around the world expand their balance sheets rapidly, gold should do well. The unwinding of carry trades is negative for it. As dollar appreciates with the unwinding of carry trades, gold has declined in line with dollar's rise. When the unwinding is done and dollar begins depreciate, gold should resume its bullish trend. I think gold could make new highs in 2009. The bull story for gold will end quicker than for energy. When central banks begin to raise interest rates, possibly in 2010 in response to rising inflation, gold may slip into a bear market. For now, gold still looks bullish. |
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迟了点，不过也写写俺对八强的看法 (2008-3-16) joaquin 
发表于 2008-11-27 21:02
