Stop Me Before I Vote Again

I may need to get a bigger head, Opie. This one seems to have passed through my current one without leaving a trace.

But, by your leave, a link that SMBIVAns and those contemplating the Pledge should follow:
http://www.commondreams.org/view/2010/01/04-10

The "real" rate of exchange! Wow! There's a concept like the bit in Swift -- "it first proceeded from a Notion into a Word, and from thence in a hot Summer ripened into a tangible Substance."

Nothing like a little polynomial mathematics to gull the unwashed into thinking one holds the keys to the Economic Kingdom.

I have decided that from now on the Krug shall be called

The Most Reverend Paul Krugman, Divine Scholar of Economics.

Because really... isn't that more accurately describing his supernatural abilities?

I got a chuckle out of that one, coming so soon after Michael Hudson's republication of his critique of Paul Samuelson and the factor price equalization theorem, which is an implicit assumption in Krugman's above theories of exchange rates.

Even when I was taking my undergraduate trade and finance classes in 1990, we knew PPP and the related theory was crap, but here's Paul K 20 years later telling us that smell is all in our heads.

Wait, what?

"But... she's succeeding at this, no? And has been succeeeding at this for a decade or more.

...

There is no law of gravity for relative price levels, none, at least, that Trans-nat Man in his diabolic ingenuity can't overcome."

What about the 2007-2009 crisis? That was a pretty bad jam up for them. they failed to take into account all the side-effects of the rigged forex system/savings glut and almost took down the whole show. I'm pretty sure that for rubin & co. it was as close to a near death experience as they will ever see.

Some pretty extraordinary fed and treasury actions managed to prop it up, but I'm pretty sure that the next crisis isn't too far away.

The more I read about it, the more likely it seems that the next shock will originate in China. The extreme credit expansion that they have unleashed has been going into some of the most wild speculative real estate activity that the world has ever seen. Basically every SOE in China is balls deep in billion dollar real estate and development deals that make about as much sense as that Dubai tower. They get preferential access to politically directed credit, and incredibly lax repayment requirements - as in there are no repercussions for defaulting. This has led to an absurd situation where (often corrupt) Chinese SOE managers of say a safety pin factory are using government directed credit to build luxury condos. A lot of land is being forcefully expropriated from poorer chinese. The land is literally sold from underneath them by corrupt government officials, and the developers send in gangs of hired thugs to beat any resistors into submission. Although it seems to be just in the larger cities, the real estate bubble and overbuilding seem to be on a scale that is many times worse than the US bubble. There's rampant over-investment throughout the Chinese economy and little demand - except for consumption goods that double as investments. you know, like garlic:

China's garlic rush carries whiff of opportunism
http://www.ft.com/cms/s/0/6a1bb282-da2b-11de-b2d5-00144feabdc0.html

I have a hard time seeing how this doesn't end badly.

also, op, did you see the thinkpeice by His Venality in Newsweek?

Getting the Economy Back On Track - Robert E. Rubin - Dec. 29
http://www.newsweek.com/id/225623/page/1

also sounds like the other members of the southern exposure club are less amused by chinese biz-poaching now that there's less market to marketshare.

http://www.project-syndicate.org/commentary/rodrik38

my man dani rodrik
wades into these ever deepening waters

"we are left, it seems, with two equally unappetizing options. China can maintain its currency practices (the low ball peg ),
but at the risk of large global macroeconomic imbalances and a major political backlash in the US and elsewhere."

" Or it can let its currency appreciate, at the risk of inducing a growth slowdown and political and social unrest at home. It is not clear that advocates of this option have fully comprehended its potentially severe adverse consequences."

and adds this anti trans nat step forward

"There is, of course, a third path, but it would require re-writing the WTO’s rules."
ie the trans nat casino core - house odds regime

" If China were allowed a free hand with industrial policies, it could promote manufactures directly while allowing the renminbi to appreciate. This way the increased demand for its industrial output would come from domestic rather than foreign consumers."

industrial policy of this kind is inevitablt trans nat unfriendly eh ???

hence dani's next line
"It is not a pretty solution.."

which is followed by the clincher

" but it is the only one. "

"The great advantage of industrial policies is that they enable growth-promoting structural change without generating trade surpluses. "

if you think it thru we need one too

because
industrial policies.. enable growth-promoting structural change ...
whithout generating trade .. deficits

industrial policies " are the only way to reconcile China’s(and norte amigos) continued need for industrialization with the world economy’s requirement of lower current-account imbalances"

http://www.project-syndicate.org/commentary/rogoff57

evil pixie chess master kenny ripoff
is a trans nat smoking gun barrel on this

no big stim leading to rapid job recovery here
combined
with a trade balancing yuan reval
not for mr ken of the MNC flak team

instead

"... Wouldn’t it be better to accept more adjustment now ...in the form of slower post-crisis growth "
otherwise we'd just ".. set ourselves up for an even bigger crash? "

crash ? what this time
the forex fiddle tilt tumbling down
under a wave of protectionist frenzy

this is gonna be the best decade ever.

WTO rules? like the rules against undervalued currencies? or the myriad of other rules that China casually breaks?

As the chief constraint on China's policy options, that's pretty far-fetched. How is China not currently pursuing industrial policy??
"high tariffs, explicit subsidies, domestic content requirements on foreign firms, investment incentives, and many other forms of industrial policy."
China is currently doing every single one of those things. No one is stopping China from running industrial policy any way they please. The constraints are internal.

Rodrik is just using China as a prop for his own preconceived arguments (again) with little regard for how anything in China actually works. IIRC up until quite recently (this article perhaps?) he was arguing that there wasn't really any problem with the peg at all. I enjoyed most of one economics, many recipes, but anytime he deals with China it's just terrible. TBH, as much as I loath Rogoff, he actually gets closer to the core problems than Rodrik, despite some heinous neo-lib talking points and prescriptions thrown in the mix.

bob

do you get the point here
or are you so caught up recognizing trees you are familiar with
you have no idea where burnham woods is marching

give me your why for the stag here and the present forex arrangement

both dani and ken are very sharp payers

but ken is a straight bif boy mouth piece like marty feldstein amd greg mankiw

the crimson pirates

I get your larger point, but the whole WTO argument is just a silly, totally wrong diversion. It's a case of tilting at windmills.

Rodrik argues that China has been forced to pursue currency manipulation because the WTO bans other forms of industial policy - but the WTO also bans currency manipulation. The argument is false right on the face of it. On top of that logical contradiction, he is alsofactually wrong about China not being able to pursue industrial policy. The whole article is basically garbage.

"give me your why for the stag here and the present forex arrangement"

Because both policies are naturally favored by capital owners in the US according to the Stolper-Samuelson theorem. Fixed exchange rates, lack of effective monetary policy are in the interest of owners of capital, flexible exchange rates and effective monetary policy are in the interest of workers. That leaves the massive fiscal policy option, which is also opposed by owners of capital since they want to avoid inflation and preserve the value of their assets. The US is pursuing a classic capital-first policy, wherein almost all of the fiscal and monetary response has been directly aimed at protecting the value of capital assets.

In terms of addressing the undervaluation through a reval while maintaining the peg: owners of capital in the US would still be against a revaluation of the fixed peg as it would devalue their holdings. They like pegs to begin with, and an overvalued peg is just icing on the cake. On top of that there are very profitable arbitrage opportunities to be had when they can deploy their capital on both sides of the currency divide.

bob
your grasp of this seems odd to me
the wording strikes me as precarious
pegs can of course be re adjusted and a fixed rate system
uses the relative rates of gdp expansion and price level changes to keep trade in balance

but here the balance is not a target per se
in fact the wind fall profits come from the over valued dollar

"In terms of addressing the undervaluation through a reval while maintaining the peg"

only possible if we have a huge slow down here
and or faster inflation there

the big obstacle in adjustments
thru price levels is obvious even if the horror of deflation
--now facing spain-- is avoidable
that can only mean the under valued currency zone must increase its inflation rate

"owners of capital in the US would still be against a revaluation of the fixed peg as it would devalue their holdings. "

what holdings
in which currency ??

real holding in the us or china ??
or are you talking about the purchasing power of dollars in china
which is indeed the primo issue for our american corporate outfits

that whole passage strikes me as
an odd
way to say an over valued dollar
vis a vis rmd
is favored by yankee investors in china
and exporters to the us from china
ditto for the overr valued euro investors etc

"They like pegs to begin with, and an overvalued peg is just icing on the cake"

no ovr valing is the cake so long as the right zone is over valued
ie the advanced industrial zone

the peg is the yuan to the dollar
and its undervalued at the peg rate right ???
so forget the Stolper-Samuelson theorem
that is a long run equilibrium result
with balance trade and
in a vastly simplified trade world model
that hardly applies in the real world
but more decisively this is a purely dynamic process in a system dominated
by monopolistic competitors ie oligops

ps
capital is not strictly speaking
or correctly speaking
a factor of production
labor land and resources are of course
but not intermediate ouputs like machines
and skills no matter how often this is muffed
i'm sure you're thinking of corporations
using " factors" called capital
but credit technology and
market access
plus international organization
are not factors
even if paul samuelson's desciples
like to fudge that up some

"Fixed exchange rates, lack of effective monetary policy are in the interest of owners of capital"

not necessarily fixed
only undervalued fixed rates
where the over valued zone's firms
want to invest in
underavaled zones or export
from valued currency zone
back into the over valued zone
also
recall uneven inflation rates
can serve the same end as exchange rate adjustments

" flexible exchange rates and effective monetary policy are in the interest of workers"

again not necessarily

certainly over valued zones workers are under unfair competitive disadvantages
but workers in the under valued zone benefit
from a low ball peg

"the massive fiscal policy option, which is also opposed by owners of capital since they want to avoid inflation and preserve the value of their assets"

no i doubt inflation fears
concern the trans nats at least in an open system like we have
consider inflation in the over valued zone in the presents of a maintained peg
only increases the trade gap problem

plenty of other reasons why the trans nats might oppose effective fiscal policy
but today its rapid return to full employment
thru fiscal deficits they oppose
in the over valued zones
because such increase in effective demand
exacerbates the trade gap
which threatens protectionist convulsions

"The US is pursuing a classic capital-first policy"
first and last and all in between

"almost all of the fiscal and monetary response has been directly aimed at protecting the value of capital assets"

do u mean the purchasing power
of financial securities ???

"In terms of addressing the undervaluation through a reval while maintaining the peg"
you mean a re peg process
well the rate of the re peg is the issue because we are seeing a re peg process only its wildly slow

the economics here is fairly non elementary

The wording may be precarious, but I don't think the grasp is really odd.. it's straight textbook material. I think the main problem is that I used "undervaluation" and "overvaluation" without specifying which country I was referring to.

"what holdings
in which currency ??"

US investors holding cash and securities, USD

"are you talking about the purchasing power of dollars in china
which is indeed the primo issue for our american corporate outfits"

yes, but also the global and domestic purchasing power of dollars in general and the real value of (often fixed) future cashflows, which is an issue for all of the american capital rentiers, not just those involved in the China trade

"that whole passage strikes me as
an odd
way to say an over valued dollar
vis a vis rmd
is favored by yankee investors in china
and exporters to the us from china
ditto for the overr valued euro investors etc"

yes, but it goes beyond that. Forbes & co. would still be preaching the strong dollar gospel even if there was no China trade.

"not necessarily fixed
only undervalued fixed rates"

I guess it's not a necessary preference (they didn't like fixed rates under BW) but any corporations involved in international trade do tend to favor even a correctly valued peg over a floating rate - so long as it is accompanied by capital mobility of some form as under gold standard or the current US-China quasi-gold standard dynamic that Krugman remarked upon.

"recall uneven inflation rates
can serve the same end as exchange rate adjustments"

yes I know - the old gold standard bootstrap treatment. China won't accept rapid inflation, neither China or the transnats wants a drastic repeg, so the US bears the adjustment through drawn out unemployment and deflation

"do u mean the purchasing power
of financial securities ???"

yes

"you mean a re peg process"

yes,

"certainly over valued zones workers are under unfair competitive disadvantages
but workers in the under valued zone benefit
from a low ball peg"

yes, that's the story according to Stolper-Samuelson. I was referring to just the US workers.

"well the rate of the re peg is the issue because we are seeing a re peg process only its wildly slow"

yes a slow re-peg doesn't do much at all. I'm pretty sure that once you establish an undervalued peg, and use sterilization to avoid inflation induced PPP, the margin of undervaluation grows quite quickly (as mirrored by the trade balance). The longer it goes on for, the larger and more painful the necessary repeg becomes.

The general point I was making is that the whole suite of policies (undervalued yuan peg, low US deficits, low Chinese inflation, high US unemployment etc. etc.)- while especially friendly to those involved in the China trade - is also consistent with the broad preferences of the most of the current US capital rentier class. That's why the policies have broad support beyond just the China manufacturing transnats. Most of the export-oriented and import competing interests that fought for the Plaza Accord and would currently be fighting for a repeg either never recovered from their Volcker era wounds, or have since gone over to the darkside and outsourced production. the countervailing balance of interests at the elite level is gone. the Stolper-Samuelson theorem becomes a lot more useful now that the big rentiers are all of one mind.

I wouldn't be so quick to dismiss Stolper-Samuelson. It's not perfect, but in terms of a simple and elegant framework for answering the cui bono questions of international trade and monetary policy I think it is quite useful.

also consistent with the broad preferences of the most of the current US capital rentier class

i agree passive rentiers big small and stupid
provide broad infra class support
one assumes a passive creditor class holds to maximum real value of their debtors future obligations to them

all true

but the trans nats with unlimited
access to "new " credit lines
really have a choice
as they have a choice between various currency zones for placement of assets production purchase sale tax payments profit accrual etc
movement and removement is their game
it floats as the currencies and various state policies in taxation and regulation change and local wages shift relative to each other

and at this time they opt for deflationary stagnatory macro policy in the oecd
to minimmize trade deficit pressure
because they want to prserve their global forex fiddle against "honest protectionism"
which is no more then fair trade

with the up hill north south tilt
a precious construct to them

any specific bilateral aspect ie yuan/dollar
might be adjustable
if necessary or prefered
but the whole system is a core/perphery
north house odds set up
they wouldn't even let their own
national passive creditor base
disrupt this if it came to that

as to stop and sam

better to just note the dynamic
class share effects of policy
and junk the sterile euclidian economics
of the 101 trade course

i love old paul-sam
and the beauty of his theorems makes for lots of expository pleasure
but it captures zero reality

as to dynamics then

to lay out the relevent relative rates of change

1)each zones price level changes

2) each zones per product
constant price level ie real
productivity changes
--not on you list of dynamics
but since you like samuelson
perhaps u've seen his paper of i think 93
on the dynamics of relative productivity change in a ricardian model

--not an H-O model as used in stop sam --

3) each zones rate of gdp growth

all these thru income
and/or relative price substitution effects
wiull impact the gar path over time
they all together
drive each zones
moment to moment
propensity to import from
and export to
the other zone

the beauty of the adjustable exchange rate
is best noticed by its sinister use here
generating as mediatory killer
of self correcting trade paths

of course the forex fiddle itself
requires the overlaid and interlaced
hi fi funds flows
which are the source of the high profits
and the preservation of those high profits
by keeping the water running up hill

one ought to have a fairly
accurate stylized model of all this
in some inter active form
on the web
but i can't point to one here

we need to show the prog herd
just hopw this works
nd also show
how with a diffrent set of policy objectives and use of these instruments
a progressive total welfare targeting alternative set of policy goals could also work

to point to china's fast growing wage class and its apparent gains in size and income
relative to prior landles peasant incomes
all from trans nat dominated trade
and say would you trade this process in for one that did less for the wagery there but more the wagery here --a choice one often sees
hurl at the poor good hearted underdog prefering pwog folks
assumes there is no better way to acomplish all this and more
ie a path both feasible
and able to industrializes china
just as fast or faster
without de industrializing the oecd countries
in the process

technical transfer without profiteering
and balanced large scale cross boder trade without wage job destruction and degradation
on one side or traditional landless
peasant stagnation on the other

even more basic is a development policy using a paradigm of maximum internal growth not maximum cross boder growth

right now only international products and producers get up to date technology
in the possess of the trans nats

the whole rig keeps the emerging world sector
growing against itself
fighting for trade share not governed by possible technical gains in productivity if the techniques were openly availible
for producers aiming at domestic markets only

the sepped of progress is now
gated by the width of oecd market absorption
of emerging world sector products and commodities

the secret of macro post keynes is simple

each nation on a path thru industrialization
can grow as fast as china provided it has access to technology and well organized internal tax and finance systems
no it might not reach the economies of scale possible with open regional cross borders
--yes market size has a huge potential impact on closed systems productivity as hume
and many others less wonderful
noticed long ago --
but modernization and convergence can happen merely by tach trans for
an obvious point of course one even harry truman understood
but a point quickly and massively obscured by the trans nat IP fiends eh ???

and external exchange rate adjustment

it is precisely this autonomy of self development
that lies behind dani boys call for
national emerger industrial policy
he is like the hectorish opposite
to that axiomatic chi school
growth loon
child of thetis
pecos paul romer
now playng
the high plains grifter abroad
with his hanseatic fantasy zones

bob i submit you give rodrik a second chance

my favorite dani-ism
cross border worker migration
skilled or unskilled
is more global welfare enhancing
then migration of " finance capital"
or even cross border trade itself
because the migrant captures
more of the value
she creates thru her migration
leaving less
for the various corporate rent traps

I more or less agree... I see what you are saying about s-s's shortcomings in ignoring productivity. Haven't read the samuelson paper, but I will take a look

As far as Rodrik goes, I haven't written him off entirely(like I said, I enjoyed OEMR, and his trilemma is nifty) but I have to say I feel ambivalent towards him.
A lot of his articles are pretty inconsistent. IIRC, you noticed the same thing a little while back. Also, my impression of one economics, many recipes is that the "many recipes" bit refers to many recipes of development strategy aimed at the same neo-lib goal, rather than referring to any different long term configurations, say for those of us here in the OECD. It seems like more of the same "let the little guys cheat at the expense of joe sixpack in ohio, he's already fat enough"(for example, his support of the peg). I can't really knock him for being in-the-tank for the poor of the global south, or deny that policies aimed a grabbing market share from the OECD are better than the shoot-yourself-in-the-foot Washington Consensus policies from a developing nation perspective, but at the same time I don't really see him providing the "third way" you are talking about. It all seems fairly orthodox to me, hence his warm reception. Take immigration for example: isn't pretty much every economist theoretically in favour of free immigration?

good article:
http://mpettis.com/2010/01/everyone-wants-to-talk-about-currencies/