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air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, break the buck, Bretton Woods, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy, zero-sum game
Real Commodity Prices (deflated by unit value of exports of manufactures from advanced countries; December 1982 = 100) Source: IMF and Thomson Reuters Datasteam If so, this would affect not just China, but the world economy. A particularly important possibility is weakness in real commodity prices after almost a decade of elevated levels (see Figure 27). If so, that would certainly have a sizeable impact on commodity exporters, many of which are emerging and developing countries. GLOBAL REBALANCING The emerging economies confront one final challenge: global rebalancing after the crises. They were able to take advantage of strong demand growth in high-income economies before then. Afterwards, they had room, for a while, to promote their own domestic demand. But the weakness of demand in the high-income economies is likely to be permanent, not temporary. Indeed, under Germany’s tutelage, the Eurozone is forcing itself into export-led growth.
But there is no way for a single country to deliver this, so long as it has an open capital account and a monetary policy oriented towards domestic price stability. This is particularly true for a country that issues a reserve currency: it effectively loses control over its exchange rate. So this brings us to one of the biggest issues raised by the argument in this book, particularly in Chapter Five: global rebalancing. GLOBAL REFORM One way out of the apparent demand trap would be via global rebalancing. The evidence at present is that high-income countries are no longer able to absorb the savings that would be generated by their private sectors if their economies were running at something close to full capacity and were also not experiencing an unsustainable credit expansion.46 This is why activity has been persistently weak and real interest rates low.
But there are also deeper structural issues in many countries, which interact unfavourably with the more adverse external conditions: poor quality of labour forces; ageing of the populations, slowing growth of productivity; and rising external imbalances. Sustaining growth means continued reform. In its absence, sources of rapid growth weaken. That is probably a sizeable part of what we are seeing.25 Managing China’s Inevitable Slowdown The challenge for emerging economies is not just managing the global rebalancing. It is also that of adapting to what might become a big slowdown in the Chinese economy. One of the reasons many emerging economies did so well after the crisis is that China itself did so well (see Figure 20). It is not only the world’s second-largest economy but significantly bigger than Brazil, India and Russia together. It is also the world’s biggest source of demand for commodities. Its continued rapid growth helped both itself and the rest of the world through the crisis.
airport security, banking crisis, barriers to entry, Berlin Wall, blood diamonds, Bretton Woods, BRICs, capital controls, clean water, creative destruction, Deng Xiaoping, Doha Development Round, energy security, European colonialism, failed state, global rebalancing, global supply chain, income inequality, informal economy, Intergovernmental Panel on Climate Change (IPCC), Julian Assange, labour mobility, Martin Wolf, mass immigration, Mikhail Gorbachev, mutually assured destruction, Nixon shock, nuclear winter, Parag Khanna, purchasing power parity, reserve currency, Ronald Reagan, smart grid, South China Sea, sovereign wealth fund, special economic zone, Stuxnet, trade route, uranium enrichment, Washington Consensus, WikiLeaks, Yom Kippur War
Some of these high-wire acts have already been mentioned: America must prove that it can continue to meet its long-term financial obligations and restore public confidence in government. China must find a way to shift its economy from dependence on exports toward domestic consumption. Europe needs to ensure that the Germans, Dutch, and Scandinavians don’t end up permanently bankrolling a social safety net for the Greeks, Portuguese, and Spanish. These are policy choices, if unpleasant ones born of necessity, but the world is also facing a global rebalancing between countries like America that consume too much and save too little and those like China that consume too little and save too much. This version of the trend is not the result of policy; it will be an order imposed by economic circumstances over which no one has effective control—and it is only just beginning. Yes, emerging players will continue to see their leverage increase within existing institutions, and they will begin to push for the creation of new ones.
Its economy and population are a small fraction of America’s or China’s, and becoming a military power once again would require a huge shift in Germany’s political culture, considerable time, and hundreds of billions of euros. The limited international use of its language would also undermine any bid to expand Germany’s cultural influence. But its economic and diplomatic leverage, particularly within Europe, is considerable. This is potentially one of the world’s most important pivot states. With Europe’s most powerful and resilient economy, Germany might find enough common ground with China during a period of global rebalancing to sharply limit the need for China to partner with America. Nor are G-Zero crises that push America and China closer together necessarily more likely than those that might drive them apart. A full implosion in North Korea is as likely to produce U.S.-Chinese conflict as cooperation. U.S. officials would probably insist on Korean reunification—though that would come with a price tag no single state can afford, far in excess of Germany’s reunion, because today’s South Korean economy is not as strong as West Germany’s in 1990 and North Korea has nowhere near the resources that kept East Germany alive.
The Soviet system then collapsed because openness soon unleashed the centrifugal forces that pulled the empire apart. Today’s China is in need of long-term economic and social reforms almost as ambitious, and its government will be undertaking these changes just at a time when the G-Zero is likely to supply the system with unexpected shocks. If Beijing can’t manage the growing social unrest described in the previous chapter, if it can’t cope with a rising tide of environmental disasters, if global rebalancing begins to cost China jobs and to benefit neighboring economies at China’s expense, if a more serious market meltdown inside Europe and the United States—China’s leading trade partners—puts tens of millions out of work, if public disgust with corruption takes on a life of its own on the Internet, if state attempts to quell another student uprising meet resistance coordinated with modern tools of communication, we might well see a fundamental change over time in how China is actually governed.
Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis by Anatole Kaletsky
bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Black Swan, bonus culture, Bretton Woods, BRICs, Carmen Reinhart, cognitive dissonance, collapse of Lehman Brothers, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, Edward Glaeser, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, F. W. de Klerk, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, global rebalancing, Hyman Minsky, income inequality, information asymmetry, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, Long Term Capital Management, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, money market fund, moral hazard, mortgage debt, new economy, Northern Rock, offshore financial centre, oil shock, paradox of thrift, Pareto efficiency, Paul Samuelson, peak oil, pets.com, Ponzi scheme, post-industrial society, price stability, profit maximization, profit motive, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, statistical model, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, Vilfredo Pareto, Washington Consensus, zero-sum game
Again, the problem was not one of principle but of execution, as explained in such excellent books as The Trillion Dollar Meltdown by Charles Morris and Fool’s Gold by Gillian Tett, although sometimes belied by their sensational marketing (Tett’s subtitle was: How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and Unleashed a Catastrophe.) The question of property speculation, on the other hand, demands more attention. House prices have far greater resonance for ordinary people than asset securitization or global rebalancing. Yet the public discussion of the role of housing in the crisis has been misleading and superficial. It is taken as axiomatic in all explanations of the crisis—from tabloid newspaper headlines to learned academic articles—that the rise in U.S. house prices in the years leading up to the crisis was one of the greatest financial bubbles of all time. It is a cliché that American homeowners, driven mad by greed and herded by irresponsible or crooked bankers, bid property prices up to insane levels.
But because the yen and the euro were both at least as ugly as the dollar, the Fed and the Obama administration were able to implement unprecedented programs of monetary and fiscal expansion without worrying about a flight of capital out of the United States. By doing this, they guaranteed an economic recovery and could afford to continue doing whatever it took to sustain growth in 2010 and beyond. The bigger challenges to the U.S. and world economies will appear from 2011 onward, when the longer-term problems of government and consumer debt, global rebalancing, and structural inflation may need to be seriously addressed. These are among the issues taken up in the last part of this book. Part V Capitalism 4.0 and the Future EVEN IF THE TRANSITION to Capitalism 4.0 occurs in a more orderly and peaceful manner than the previous great transitions of the 1930s and 1970s, many genuine risks will continue to face the democratic capitalist system.
But as these countries move back toward full employment, the rebalancing of global growth will make them more prone to inflation than they were in the precrisis years. From this point of view, the sooner the world economy can be rebalanced, eliminating excessive trade surpluses and deficits worldwide, the smaller the risk of dangerous inflationary pressures. Unfortunately, as discussed previously in this chapter, the prospects of such a global rebalancing occurring quickly and smoothly do not seem bright. Protectionism and deglobalization therefore could create the conditions for stagflation to return. Big Government From the mid-1960s until the late 1970s, the world experienced a large upsurge of government spending and employment. This was clearly one of the major causes of stagflation. Whatever one’s political outlook about the virtues or vices of public spending, there can be no denying that government-administered activities are generally insensitive to competition.
Currency Wars: The Making of the Next Gobal Crisis by James Rickards
Asian financial crisis, bank run, Benoit Mandelbrot, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, borderless world, Bretton Woods, BRICs, British Empire, business climate, capital controls, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, Deng Xiaoping, diversification, diversified portfolio, Fall of the Berlin Wall, family office, financial innovation, floating exchange rates, full employment, game design, German hyperinflation, Gini coefficient, global rebalancing, global reserve currency, high net worth, income inequality, interest rate derivative, John Meriwether, Kenneth Rogoff, labour mobility, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, Myron Scholes, Network effects, New Journalism, Nixon shock, offshore financial centre, oil shock, one-China policy, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, private sector deleveraging, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, Ronald Reagan, sovereign wealth fund, special drawing rights, special economic zone, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, time value of money, too big to fail, value at risk, War on Poverty, Washington Consensus, zero-sum game
Yet with the elimination of gold, the rise of floating exchange rates and the piling up of huge surpluses by developing countries, the IMF entered the twenty-first century with no discernable mission. Suddenly the G20 breathed new life into the IMF by positioning it as a kind of Bank of the G20 or proto–world central bank. Its ambitious leader at the time, Dominique Strauss-Kahn, could not have been more pleased, and he eagerly set about as the global referee for whatever guidelines the G20 might set. Despite this heady start toward global rebalancing and President Obama’s personal buy-in, two G20 summits came and went in 2010 with no significant progress in the commitments of member nations to the Pittsburgh summit goals. The IMF did conduct extensive reviews of the practices of each country under the heading “mutual assessment” and continued allegiance to the framework was paid in the G20 communiqués, but the ambitious goals of rebalancing were essentially ignored, especially by China.
Earth Wars: The Battle for Global Resources by Geoff Hiscock
Admiral Zheng, Asian financial crisis, Bakken shale, Bernie Madoff, BRICs, butterfly effect, clean water, cleantech, corporate governance, demographic dividend, Deng Xiaoping, Edward Lorenz: Chaos theory, energy security, energy transition, eurozone crisis, Exxon Valdez, flex fuel, global rebalancing, global supply chain, hydraulic fracturing, Long Term Capital Management, Malacca Straits, Masdar, mass immigration, megacity, Menlo Park, Mohammed Bouazizi, new economy, oil shale / tar sands, oil shock, Panamax, Pearl River Delta, purchasing power parity, Ralph Waldo Emerson, RAND corporation, Shenzhen was a fishing village, Silicon Valley, smart grid, South China Sea, sovereign wealth fund, special economic zone, spice trade, trade route, uranium enrichment, urban decay, working-age population, Yom Kippur War
., 42 McDougall Street, Milton, Queensland 4064, Australia Wiley-VCH, Boschstrasse 12, D-69469 Weinheim, Germany ISBN 978-1-118-15288-1 (Cloth) ISBN 978-1-118-15291-1 (ePDF) ISBN 978-1-118-15290-4 (Mobi) ISBN 978-1-118-15289-8 (ePub) Maps Africa Asia Southeast Asia Australia Middle East Europe North America South America Introduction What we are experiencing with the transformation of China is a once in a century or more event. It really is the start of a global rebalancing—a rebalancing that will continue to unfold over many decades. —BHP Billiton Chairman Jac Nasser, 9 May 2011 Six hundred years ago, China neither needed nor wanted anything from the West. It was the Middle Kingdom, the centre of the world, the seat of all that a civilization could possibly need to advance and prosper. India viewed itself through a similar prism—one rich in culture, religion, and resources.
Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, British Empire, capital controls, carbon footprint, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, crony capitalism, dark matter, deindustrialization, Deng Xiaoping, disintermediation, energy security, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, financial repression, floating exchange rates, forensic accounting, forward guidance, full employment, G4S, ghettoisation, global rebalancing, global reserve currency, hiring and firing, inflation targeting, Irish property bubble, Just-in-time delivery, labour market flexibility, light touch regulation, London Whale, Long Term Capital Management, margin call, market clearing, megacity, Mikhail Gorbachev, mini-job, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, North Sea oil, Northern Rock, offshore financial centre, open economy, paradox of thrift, Pearl River Delta, pension reform, price mechanism, price stability, profit motive, quantitative easing, quantitative trading / quantitative ﬁnance, race to the bottom, regulatory arbitrage, reserve currency, reshoring, Right to Buy, rising living standards, Ronald Reagan, savings glut, shareholder value, sovereign wealth fund, The Chicago School, the payments system, too big to fail, trade route, transaction costs, two tier labour market, unorthodox policies, uranium enrichment, urban planning, value at risk, working-age population, zero-sum game
Over the past twenty-five years, China has simply replaced Japan as the main contributor to the US trade deficit. As much as 60 per cent of China’s exports are made by foreign-owned companies, many from the USA. The iPad and iPhone are the most famous US-invented contributors to the USA–China trade deficit. So exporting China’s infrastructure boom around the world is China’s preferred route for the much-vaunted ‘global rebalancing’ agenda. Other post-crisis efforts at rebalancing the global economy have made minimal progress. One leading central banker refers to the discussions at the G20 as a ‘depressing waste of time’. The mere absence of a savage trade war in the aftermath of the crisis is the only notable but limited sign of success. During 2012, Chinese purchases of US Treasury bonds peaked, and then fell substantially.