What is the best stimulus plan to get the economy going again? The answer to this may depend on what country you come from. Your government is likely picking the biggest focus of its stimulus package based on how it understands how your local economy works. Here are my views, based on my largely unscientific and purely anecdotal observations:
Large spending on public infrastructure. You have largely untapped local resources. You have relatively minuscule business activity because your physical infrastructure, such as roads, bridges, and airports are largely non-existent or unreliable. You are likely one of the emerging markets.
Large spending on alternative infrastructure. You are confident that your local entrepreneurs are quick at capitalizing new capacities in largely-expensive but promising new technologies, such as solar and wind power, nuclear fuel, and the like. They are good at innovating new business models based on new technology. Your local population likely has a high social conscience and are willing to spend more to help conserve the environment. You probably have enough international clout, such that you can make this infrastructure the new default standard for other countries to follow, once you have made the initial roadmap. Precisely, your local companies probably expect to make a killing later on selling their technology to foreigners. You are likely the US, Japan, or Germany.
Increase in social safety nets. You are likely a largely consumer-driven economy, and your local consumers are currently very vulnerable. It may be because much of them are from the ageing demographic, or largely derive their livelihoods from salaried employment. Whatever local businesses you have follow existing technologies from abroad, or perhaps, are largely foreign branches of companies from more entrepreneurial countries. Your existing public infrastructure is probably already of highest-class. A very large spending program on alternative infrastructure will probably not be able to recoup its cost because your local population growth is stagnant, such that the increased spending will only result in increased inflation rather than increased business activity. You are likely much of Western Europe, Canada, or New Zealand.
Increase in social services spending. You probably have a population that can be better-served by better educational facilities, better social services, better healthcare, better law enforcement agencies, etc. You believe that an improvement in these public services will cause people to pay less for these out of pocket (if they otherwise get them from private sector providers), thereby inducing them to allocate more expenditures to a broader segment of the economy. You are probably right. And you are probably any country in the world.
Business income tax rate cut. You probably have very high business taxes, and your high taxes are probably being passed on as higher prices of goods and services. Lowering tax rate would likely induce local business to lower their prices, and you likely believe that local consumers will start buying once they do. Perhaps local consumers are still largely employed, and are only waiting it out for lower prices. I don’t know what country you are.
Additional business tax credits. Ditto for additional business tax credit measures. In addition to lowering the prices of goods, tax credit that is meant to induce more hiring will likely result in more hiring by businesses willing to bet that increased hiring will result in a more vibrant consumer economy. You think everyone will end up benefiting, so everyone will do his share. Your local population is probably reeling from recent job losses, but will likely spend again once they know they will have a livelihood to support themselves with. You are likely much of Western Europe, Canada, Australia, or New Zealand.
No major fiscal move, keeping the government off the market. This is probably best if your economy is very heterogeneous, made up numerous small-scale businesses, perfect competition exists, and no one firm is too big to fail. You are probably heartland USA, heartland any country.
Of course, I am generally generalizing. But each plan is best in certain circumstances.
Thursday, January 29, 2009
Tuesday, January 20, 2009
Chinese excess savings, declining world trade, and the rising US dollar
Brad Setser has an intriguing piece that tries to understand how Chinese money flows are influencing the current economic dynamic.
From what I gather, he is essentially saying that :
a. China’s exports may be slowing, but imports are slowing faster, leading to a wider Chinese trade surplus
China would import less. It would buy less. And since the rise in Chinese demand helped push the price of various commodities up, it stands to reason that a fall in Chinese demand would push prices down. It probably already has. That implies a big fall in China’s import bill, and a larger trade surplus.
b. The slowing Chinese economy may be reducing investment growth, but savings growth is decreasing less, and it is creating more local “excess savings” that could now be re-lent elsewhere
China’s slowdown reflects a fall in investment (especially in new buildings and the like). Less investment and the same level of savings means a bigger current account surplus. In practice, though, savings would also likely fall a bit — as a slowdown would cut into business profits and thus business savings. It possible that China’s households would reduce their saving rate to keep consumption up as their income fell. But it is also possible that Chinese households might worry more about the future and save more. My best guess though is that the fall in investment would exceed the fall in savings, freeing up more of China’s savings to lend to the world.
c. A slowing Chinese economy would lead people to believe that the government will devalue the yuan, and Chinese households anticipating this will want to hold dollars instead
A big fall in output might lead China’s savers to lose confidence in China, or rather to lose confidence in the RMB bank accounts as a stable store of value. The big fall in output might, for example, create expectations that China would devalue the RMB v the dollar — and Chinese households, anticipating the devaluation, would have a strong incentive to hold dollars.
d. In previous years when Chinese government wanted to keep yuan down and keep inflation down, it sterilized money by increasing its Central bank’s assets. Now that the goal is to get (Chinese) banks lending again in a contracting economy, the Chinese central bank will reverse this policy
China potentially faces the opposite problem. Money is flowing out, reserves are no longer growing, deflation is a bigger threat than inflation and banks may no longer want to lend. I wouldn’t worry too much though about the risk that the money supply will shrink just because China’s reserves aren’t growing. Growing reserves can lead to money creation. But so can the same stock of reserves and less sterilization. And the PBoC has enormous scope to reduce the scope of its sterilization operations. The recent cut in the reserve requirement is an obvious example.
e. This leads to more currency flowing around in China that Chinese people may opt to hold in US dollars
Someone in China will still buying foreign assets — and likely providing indirect support for the Treasury market — even if it is not China’s central bank.
So the worse off the world economy gets, more money will be flowing to the US dollar. The stronger the US dollar, and the weaker the yuan. The more expensive American exports get, the cheaper Chinese exports become.
The excess Chinese savings will lead to a bubble, no longer in American private lending, but in US Treasuries. The excess saving will no longer come from the Chinese Central bank, but from Chinese private savers.
What does this bode going forward? The US government will get cheap money on the scale enjoyed in the last few years by US financial institutions. It can afford to splurge more money on projects with ever-lower returns. Or, it can turn the problem back on China, by using the money to subsidize American goods, so they sell in America for lower than the Chinese imports.
Wouldn’t that be ironic, to see Chinese citizens subsidizing American consumers, to buy US-made goods.
From what I gather, he is essentially saying that :
a. China’s exports may be slowing, but imports are slowing faster, leading to a wider Chinese trade surplus
China would import less. It would buy less. And since the rise in Chinese demand helped push the price of various commodities up, it stands to reason that a fall in Chinese demand would push prices down. It probably already has. That implies a big fall in China’s import bill, and a larger trade surplus.
b. The slowing Chinese economy may be reducing investment growth, but savings growth is decreasing less, and it is creating more local “excess savings” that could now be re-lent elsewhere
China’s slowdown reflects a fall in investment (especially in new buildings and the like). Less investment and the same level of savings means a bigger current account surplus. In practice, though, savings would also likely fall a bit — as a slowdown would cut into business profits and thus business savings. It possible that China’s households would reduce their saving rate to keep consumption up as their income fell. But it is also possible that Chinese households might worry more about the future and save more. My best guess though is that the fall in investment would exceed the fall in savings, freeing up more of China’s savings to lend to the world.
c. A slowing Chinese economy would lead people to believe that the government will devalue the yuan, and Chinese households anticipating this will want to hold dollars instead
A big fall in output might lead China’s savers to lose confidence in China, or rather to lose confidence in the RMB bank accounts as a stable store of value. The big fall in output might, for example, create expectations that China would devalue the RMB v the dollar — and Chinese households, anticipating the devaluation, would have a strong incentive to hold dollars.
d. In previous years when Chinese government wanted to keep yuan down and keep inflation down, it sterilized money by increasing its Central bank’s assets. Now that the goal is to get (Chinese) banks lending again in a contracting economy, the Chinese central bank will reverse this policy
China potentially faces the opposite problem. Money is flowing out, reserves are no longer growing, deflation is a bigger threat than inflation and banks may no longer want to lend. I wouldn’t worry too much though about the risk that the money supply will shrink just because China’s reserves aren’t growing. Growing reserves can lead to money creation. But so can the same stock of reserves and less sterilization. And the PBoC has enormous scope to reduce the scope of its sterilization operations. The recent cut in the reserve requirement is an obvious example.
e. This leads to more currency flowing around in China that Chinese people may opt to hold in US dollars
Someone in China will still buying foreign assets — and likely providing indirect support for the Treasury market — even if it is not China’s central bank.
So the worse off the world economy gets, more money will be flowing to the US dollar. The stronger the US dollar, and the weaker the yuan. The more expensive American exports get, the cheaper Chinese exports become.
The excess Chinese savings will lead to a bubble, no longer in American private lending, but in US Treasuries. The excess saving will no longer come from the Chinese Central bank, but from Chinese private savers.
What does this bode going forward? The US government will get cheap money on the scale enjoyed in the last few years by US financial institutions. It can afford to splurge more money on projects with ever-lower returns. Or, it can turn the problem back on China, by using the money to subsidize American goods, so they sell in America for lower than the Chinese imports.
Wouldn’t that be ironic, to see Chinese citizens subsidizing American consumers, to buy US-made goods.
Wednesday, January 14, 2009
Fiscal deficits and reviving 'animal spirits'
The most important discussions, in my opinion, this year, and particularly for the next 6 months, will be those that define and refine the fiscal stimulus debate. The most productive discussions seem to be coming out of Mark Thoma, Paul Krugman, Robert Reich, Joseph Stiglitz, and Brad deLong.
To round out the debate, I would also encourage interested readers to read the skeptical views of Greg Mankiw, and Tyler Cowen.
I myself am leaning more in favour of having an ambitious Keynesian-type fiscal stimulus from the government. Coming from a financial markets background, I am familiar with the need of plugging in occasional shortfalls in investment from various sources, particularly if the shortfall threatens to undermine the entire investment. More importantly, we need to shore up the confidence of those who have already invested, so they do not pull out, and further increase collateral damage.
I find this true whether in thinking of micro activities, or of the macro economy. There is no worse way to revive the “animal spirits” of legitimate businessmen than to show them that they’re on their own in propping up both their own investments, and the larger economy. And many legitimate small businessmen will only continue investing if they know the government is committed to doing its share in reviving the economy.
However, given that there is currently a coordinated worldwide slump, there is the added problem of finding the still cash-rich party who will fund these coordinated stimuli. Not all countries are created equal, and not all are equally capable of funding fiscal deficits.
As is already observable, those who most need a stimulus are already mired in debt, while those surplus producers who may have the excess cash are, if they lent to the deficit consumers, licking their wounds from debt losses, or if not, unwilling to start doing so now. This is again true, at the micro level of banks, and perhaps also by now at the macro level of nations.
The only feasible alternative I could think of now, as expressed here and here, is a reverse globalization. Perhaps the “animal spirits” of local businessmen will revive once they know that they can invest long-term in “risky” new ventures if they know that they will not suddenly be undercut by a low-cost foreign competitor once the local market for his business picks up.
In the same way, perhaps local investors, who may still be looking for a secure investment outlet for their remaining money, will be more than willing to invest in their local government, if they knew that the benefits will accrue to their own economy and not trickle away to surplus-producing countries. So it would seem that recovery is quicker achieved by nations separately, or at the most, by complementary trading blocs.
But that’s just my take. For sure, finding the right balance between globalization and reviving national economies, as well as choosing the right fiscal stimulus program, are the urgent matters of the day. Let’s see what the experts come up with. For the next few weeks, I defer the reader to fiscal commentaries of those mentioned above, who have more access to quantitative studies of fiscal programs, both real-time and historical. Let's see how the interaction of ideas and events play out.
To round out the debate, I would also encourage interested readers to read the skeptical views of Greg Mankiw, and Tyler Cowen.
I myself am leaning more in favour of having an ambitious Keynesian-type fiscal stimulus from the government. Coming from a financial markets background, I am familiar with the need of plugging in occasional shortfalls in investment from various sources, particularly if the shortfall threatens to undermine the entire investment. More importantly, we need to shore up the confidence of those who have already invested, so they do not pull out, and further increase collateral damage.
I find this true whether in thinking of micro activities, or of the macro economy. There is no worse way to revive the “animal spirits” of legitimate businessmen than to show them that they’re on their own in propping up both their own investments, and the larger economy. And many legitimate small businessmen will only continue investing if they know the government is committed to doing its share in reviving the economy.
However, given that there is currently a coordinated worldwide slump, there is the added problem of finding the still cash-rich party who will fund these coordinated stimuli. Not all countries are created equal, and not all are equally capable of funding fiscal deficits.
As is already observable, those who most need a stimulus are already mired in debt, while those surplus producers who may have the excess cash are, if they lent to the deficit consumers, licking their wounds from debt losses, or if not, unwilling to start doing so now. This is again true, at the micro level of banks, and perhaps also by now at the macro level of nations.
The only feasible alternative I could think of now, as expressed here and here, is a reverse globalization. Perhaps the “animal spirits” of local businessmen will revive once they know that they can invest long-term in “risky” new ventures if they know that they will not suddenly be undercut by a low-cost foreign competitor once the local market for his business picks up.
In the same way, perhaps local investors, who may still be looking for a secure investment outlet for their remaining money, will be more than willing to invest in their local government, if they knew that the benefits will accrue to their own economy and not trickle away to surplus-producing countries. So it would seem that recovery is quicker achieved by nations separately, or at the most, by complementary trading blocs.
But that’s just my take. For sure, finding the right balance between globalization and reviving national economies, as well as choosing the right fiscal stimulus program, are the urgent matters of the day. Let’s see what the experts come up with. For the next few weeks, I defer the reader to fiscal commentaries of those mentioned above, who have more access to quantitative studies of fiscal programs, both real-time and historical. Let's see how the interaction of ideas and events play out.
Thursday, January 1, 2009
Wacky stories of 2008
This is indeed a madcap world. Below are some of the wacky stories of 2008, which goes to show just how economic realities affect daily lives in different countries. (HT: Tim Iacono)
Some of the year's top off-beat tales included a Canada brewery that created a special tough times bitter and "Sarah's Smash Shack" in California, which charges patrons $10 for 15 minutes of pleasure pulverizing dinnerware against a wall. "It was the best $50 we've spent in the last two years," said insurance broker Adam DeWitt, who smashed plates in San Diego with his wife after his home mortgage loan was rejected.
In May, a Wall Street restaurant boasted it was selling the costliest burger in New York, with the $175 patty made of Kobe beef, black truffles, seared foie gras and flecks of gold leaf.
One bank in Kazakhstan offered a diamond-encrusted credit card for well-heeled clients with incomes over $300,000. A jeweler in Tokyo kept busy selling 13-piece tableware sets made of gold for $1 million -- aimed at newly rich Chinese customers.
Yet there was no need for any plates at all in Bihar, one of India's poorest states where authorities encouraged people to eat rats to fight rising food prices and save grain stocks. They praised rat meat a healthy alternative to rice.
In Germany, the crisis sparked an unlikely revival of interest in Karl Marx, the founding father of communism whose heavy analysis of capitalism "Das Kapital" became a top seller.
A Polish man got the shock of his life when he visited a brothel and spotted his wife among the establishment's employees, making some extra money on the side. After 14 years, the couple are divorcing.
An Indian Muslim couple made news for exchanging wedding vows by phone after the groom, who lives abroad, said he did not have money to return home. The whole village witnessed the ceremony when clerics put the mobile phone on speaker mode.
And who could forget this story from Haiti....
With food prices rising, Haiti's poorest can't afford even a daily plate of rice, and some must take desperate measures to fill their bellies. Charlene, 16, with a month old son, has come to rely on a traditional Haitian remedy for hunger pangs: cookies made of dried yellow dirt from the country's central plateau.
..........or of a Zimbabwe man going to the grocery with wheelbarrow of cash who was robbed, and his wheelbarrow taken away.
Some of the year's top off-beat tales included a Canada brewery that created a special tough times bitter and "Sarah's Smash Shack" in California, which charges patrons $10 for 15 minutes of pleasure pulverizing dinnerware against a wall. "It was the best $50 we've spent in the last two years," said insurance broker Adam DeWitt, who smashed plates in San Diego with his wife after his home mortgage loan was rejected.
In May, a Wall Street restaurant boasted it was selling the costliest burger in New York, with the $175 patty made of Kobe beef, black truffles, seared foie gras and flecks of gold leaf.
One bank in Kazakhstan offered a diamond-encrusted credit card for well-heeled clients with incomes over $300,000. A jeweler in Tokyo kept busy selling 13-piece tableware sets made of gold for $1 million -- aimed at newly rich Chinese customers.
Yet there was no need for any plates at all in Bihar, one of India's poorest states where authorities encouraged people to eat rats to fight rising food prices and save grain stocks. They praised rat meat a healthy alternative to rice.
In Germany, the crisis sparked an unlikely revival of interest in Karl Marx, the founding father of communism whose heavy analysis of capitalism "Das Kapital" became a top seller.
A Polish man got the shock of his life when he visited a brothel and spotted his wife among the establishment's employees, making some extra money on the side. After 14 years, the couple are divorcing.
An Indian Muslim couple made news for exchanging wedding vows by phone after the groom, who lives abroad, said he did not have money to return home. The whole village witnessed the ceremony when clerics put the mobile phone on speaker mode.
And who could forget this story from Haiti....
With food prices rising, Haiti's poorest can't afford even a daily plate of rice, and some must take desperate measures to fill their bellies. Charlene, 16, with a month old son, has come to rely on a traditional Haitian remedy for hunger pangs: cookies made of dried yellow dirt from the country's central plateau.
..........or of a Zimbabwe man going to the grocery with wheelbarrow of cash who was robbed, and his wheelbarrow taken away.
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