macroeconomics - Bao Wen Chen on Diigo

20 May 09

the subfield of macroeconomics was born not as a science but more as a type of engineering. God put macroeconomists on earth not to propose and test elegant theories but to solve practical problems. The problems He gave us, moreover, were not modest in dimension. The problem that gave birth to our field—the Great Depression of the 1930s— was an economic downturn of unprecedented scale, including incomes so depressed and unemployment so widespread that it is no exaggeration to say that the viability of the capitalist system was called in question.
As the field of macroeconomics has evolved, one recurrent theme is the interaction—sometimes productive and sometimes not— between the scientists and the engineers. The substantial disconnect between the science and engineering of macroeconomics should be a humbling fact for all of us working in the field.

25 Apr 09

FT.com / Columnists / Martin Wolf - What the G2 must discuss now the G20 is over

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macroeconomics

It is easier for most to believe that the explanation for the crisis is solely the deregulation and misregulation of the financial systems of the US, UK and a few other countries. Yet, given the scale of the world’s macroeconomic imbalances, it is far from obvious that higher regulatory standards alone would have saved the world.
Fiscal deficits are now generally far bigger in countries with structural current account deficits than in those with current account surpluses. This is because the latter can import a substantial part of the stimulus introduced by the former. The Organisation for Economic Co-operation and Development forecasts a jump in US public debt of almost 40 per cent of gross domestic product over three years (see chart). It is quite likely, therefore, that the next crisis will be triggered by what markets see as excessive fiscal debt in countries with large structural current account deficits, notably the US. If so, that could prove a critical moment for the international economic system.
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- Intriguingly, the country raising these big questions is China. This is, no doubt, for self-serving reasons: China is worried about the value of its foreign currency reserves, most of which are denominated in US dollars; it wants to relieve itself of blame for the crisis; it wishes to preserve as much of its development model as possible; and it is, I suspect, seeking to countervail US pressure on the exchange rate of the renminbi.
- Wen Jiabao, the Chinese prime minister, has noted his country’s concern over the value of its vast reserves. At close to $2,000bn, these are almost half of 2008 GDP. Imagine what Americans would say if their government had invested about $7,000bn (the equivalent relative to US GDP) in the liabilities of not altogether friendly governments. The Chinese government is beginning to realise its mistake – too late, alas.

FT.com / Columnists / Martin Wolf - Why G20 leaders will fail to deal with the big challenge

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macroeconomics

Will the G20 rise to these exceptional challenges? No, is the answer. What is needed is both a large increase in aggregate demand and a shift in its distribution, away from chronic deficit countries, towards surplus ones. On both points, progress will be far too limited.
The OECD argues
that the discretionary stimulus measures taken by governments in response to the crisis will on average boost gross domestic product by just 0.5 per cent in 2009 and in 2010. In addition, the extra demand is coming at least as much from deficit as from surplus countries. This is not a recipe for resolution of global imbalances, but for their indefinite prolongation
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- Unfortunately, no consensus exists on the underlying causes of this crisis or on the best ways to escape from it. The US and UK agree that the excesses of the financial sectors have their roots not just in deregulation, but also in the massive excess supply of surplus countries, of which China, Germany and Japan (with respective current account surpluses of $372bn, $253bn and $211bn in 2007) are the most significant. But China and the continental European countries, led by Germany, argue it is all the fault of profligate deficit countries. Yet China also hopes that the world will soon be able to absorb its excess supply again.
- “The rest of the world needs to find a way of absorbing our excess supply, but sustainably, please.” Yet what happens if that cannot be achieved for the excess potential supply of all surplus countries together? In 2007, the three countries ran current account surpluses of $835bn (€629bn, £585bn). Logically, counterpart deficit countries must spend that much more than their incomes. Yet today deficit countries have run out of willing and creditworthy private borrowers.
- That change is what this crisis is all about, as the charts show. Between 2007 and 2009, the crisis-hit private sectors of the US, UK and Spain will, on these forecasts, shift their financial balances (the difference between their incomes and expenditures) massively towards surplus, as savings rise and spending is cut. In Spain, the shift is forecast to be 11.7 per cent of GDP. The main offsets in these deficit countries will be huge jumps in fiscal deficits, although the current account deficits are also, inevitably, shrinking.
- Surplus countries, which relied on the private sectors of deficit countries to do their irresponsible borrowing for them, show a very different pattern: their private sector balances will change rather little and, in all cases, will be in large surplus throughout: big current account surpluses nearly always mean private sector excess savings. But, as their external surpluses shrink, fiscal deficits will grow, partly because of deliberate policy but also because of the automatic consequences of recessions.
- So fiscal positions are deteriorating and current account surpluses and deficits are dwindling everywhere, as the private sectors of deficit countries cut back their spending dramatically. But the expected fiscal deterioration is bigger in the deficit countries than in the surplus ones. With the exception of Japan, the fiscal deficits will also be bigger in the deficit countries. The small size of the expected shift in China’s fiscal deficit, the modest level of its 2009 fiscal deficit and the persistence of the massive surpluses of its
  private and state-owned enterprise sector are striking. This is a country expecting (or at least hoping for) a recovery in external demand.
- What this analysis is telling us is quite simple: next to no adjustment in underlying structural imbalances is occurring. In particular, the non-fiscal sectors of the three big surplus countries are expected to continue to run huge surpluses. The change – temporary, the surplus countries surely hope – is that domestic fiscal expansion is modestly offsetting the decline in demand coming from deficit countries with over-leveraged private sectors. But that decline in private demand is also offset by massive fiscal boosts in deficit countries.
- This is not a path towards a durable exit from the crisis. It is a path on which the fiscal deficits needed to offset persistent current account deficits, and collapsing private spending in external deficit countries, continue indefinitely. Unless and until surplus countries recognise that this cannot continue, no durable escape from the crisis will be achieved. Understandably, but foolishly, they are unwilling to do so.

11 Apr 09

FT.com / Comment / Editorial - China slowly grows into its crucial role

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macroeconomics China

The seismic shift in global economic fortunes has accelerated China’s emergence on to the world stage. Whether it likes it or not – and until recently there were signs that it did not – China will have to play a bigger international role. Last July, Fred Bergsten of the Peterson Institute for International Economics was suggesting – whisper it quietly in Brussels – that most of the world’s big problems could be tackled by a G2 of the US and China.
That is going a bit too far, though the London summit suggests China has been growing into its enlarged boots. Even before the gathering began, Beijing told the US to take proper care of its $1,000bn in Treasury holdings through a responsible fiscal policy. It also made an intriguing proposal to enlarge the role of
special drawing rights so they could become an alternative to the dollar as a reserve currency.
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- Some other G20 participants, including Indonesia, South Korea and Argentina, recently concluded renminbi swap arrangements with China, a sign that Beijing’s weight in international finance is growing even without the benefit of a convertible currency. At the meeting itself, China contributed positively to discussions about enlarging the IMF’s budget, although it was unclear about what funding it would commit, and stood up to France’s attempts to brand Hong Kong and Macao as tax havens.
- the shortcomings of China’s political culture limit its ability to make a full contribution to global debate. For all its failings, the US remains a more attractive beacon for billions of people worldwide looking for a better life. If China is to match that, it will need to make some important changes at home.

FT.com / In depth - China greets G20 results with caution

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macroeconomics

If Nicolas Sarkozy claimed credit for much of the progress at the G20 summit and Barack Obama won plaudits for his nimble diplomacy, China gave a more cautious welcome to the results of the meeting.
Officials said they were pleased with the announced reforms of the International Monetary Fund, which include the end of the Europe-US monopoly on the leaders of the IMF and World Bank and the promised reform of the quota system to give China a larger say. While Gordon Brown, UK prime minister, said China would inject $40bn (€30bn) to the IMF’s coffers, officials said the details of China’s contribution were still under discussion.
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- “Given that some 30 per cent of China’s GDP growth in recent years has been driven by external demand, we believe that China will benefit significantly from these measures,” says Stephen Green at Standard Chartered.
- The commitment to avoid protectionism, one of China’s biggest fears, was relatively vague, and having already announced a large fiscal stimulus plan for the next two years, China was hoping for more action on this front from other countries.
- The dispute over tax havens, which only ended after Mr Obama brokered a compromise between France and China, illustrated how strongly China will defend its sense of sovereignty in economic issues.
- China has generally supported the G20 push to strengthen financial regulation – President Hu Jintao would have no problems with Mr Sarkozy’s claim that the days of the “Anglo-Saxon mode” are over. However, China has mostly supported measures that would boost regulation in western countries, such as controls on hedge funds and ratings agencies. Mr Hu’s opposition to publishing a list of tax havens that might include criticism of Hong Kong and Macao indicates China’s reluctance to see a new international regulator that might influence its own financial system.

FT.com / In depth - G20 pledge on SDRs unlikely to threaten dollar

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macroeconomics

One of the more surprising elements in the package assembled by the G20 was the decision to create $250bn in special drawing rights, a form of basket “currency” used by the International Monetary Fund.
a single creation of SDRs is a long way from a fundamental remaking of the worldwide economic order.
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- Nor will it make the IMF itself bigger or more powerful. As the IMF says: “The SDR is neither a currency, nor a claim on the IMF.”
- The SDR is not much more than an accounting unit used between governments and the IMF, made up of a basket of four widely-traded currencies – the dollar, the euro, sterling and the yen. One SDR is worth about £1, so a dollar buys 0.67 SDRs. SDRs are counted as part of government reserves and may be used as collateral for borrowing, meaning that their creation in effect can mean increasing the global money supply.
- The $250bn (€185.4bn, £169bn) in SDRs will go not to the IMF but to the member governments, according to their “quotas” or contributions to the fund. Since the larger quotas are held by richer countries, they must give or lend shares to poorer countries to achieve the aim of helping emerging market governments struggling with a loss of confidence and liquidity.
- But since SDRs are an aggregation of existing currencies, creating more will not automatically supplant the dollar. Brad Setser of the Council on Foreign Relations points out: “If China wants to diversify its reserves out of the dollar, it can do so right now. There is nothing to stop a country like Brazil issuing debt denominated in SDRs and nothing to stop China buying them.”
- Unless the creation of SDRs is repeated regularly, or countries create on a large scale assets denominated in SDRs, their role is likely to remain limited.

05 Apr 09

Two cheers for the London G20 summit | G-force | The Economist

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macroeconomics

Significantly, the IMF will print $250 billion of its own currency, known as special drawing rights, allocating sums to its members according to their quotas. It is not clear whether this can be redirected from rich countries to poor ones.
This flood of extra resources, plus an enhanced oversight role the G20 has given to the fund, will be a huge turnaround for an institution whose relevance had slumped in the boom years.
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- In a further fillip to many of them, the G20 agreed to ensure $250 billion in trade finance to help reboot global trade—though it was not clear how much of this was new money.
- As for efforts to drag the developed world out of the mire, the G20 went perhaps further than had been expected, though undoubtedly not far enough. It emphasised the problem of scrubbing toxic assets off banks’ balance-sheets, but gave little guidance on how banks should be forced to mark down their assets to saleable prices.
- Their efforts to reflate the world economy may have avoided a 1930s-style depression so far. But rising joblessness and years of pain may lie ahead as banks, businesses and households in the West continue to struggle to pay down their debts.

28 Mar 09

China's united currency idea divides nations

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Macroeconomics

Of course, the Chinese government has its own agenda, namely that American trillion-dollar stimulus plan.

Many analysts believe that all that new cash will hike the U.S. inflation rate once the American economy makes a recovery. If that prediction is accurate, the Chinese U.S. dollar holdings would lose their value, likely forcing Beijing to dump its American bonds and other securities.

Worse still, any hit to the international value of the U.S. currency would boost the worth of China's yuan. But a stronger Asian currency also would result in fewer Chinese exports, a situation which could damage that country's trade-dominated economy.

Economist's View: "Blame Economists, Not Economics"

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Macroeconomics Economists

Why, for example, did China's decision to accumulate foreign reserves result
in a mortgage lender in Ohio taking excessive risks? If your answer does not use
elements from behavioral economics, agency theory, information economics, and
international economics, among others, it is likely to remain seriously
incomplete.
The fault lies not with economics, but with economists. The problem is that
economists (and those who listen to them) became over-confident in their
preferred models of the moment: markets are efficient, financial innovation
transfers risk to those best able to bear it, self-regulation works best, and
government intervention is ineffective and harmful.
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- Instead of presenting menus of options and listing the relevant trade-offs --
  which is what economics is about -- economists have too often conveyed their own
  social and political preferences. Instead of being analysts, they have been
  ideologues, favoring one set of social arrangements over others.

Bancor - Wikipedia, the free encyclopedia

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macroeconomics

In a speech delivered in March 2009 entitled Reform the International Monetary System, Zhou Xiaochuan, the governor of the People's Bank of China called Keynes's bancor approach "farsighted" and proposed the adoption of IMF SDRs as a global reserve currency as a response to the financial crisis of 2007–2009. He argued that a national currency was unsuitable as a global reserve currency because of the Triffin dilemma - the difficulty faced by reserve currency issuers in trying to simultaneously achieve their domestic monetary policy goals and meet other countries' demand for reserve currency.^[2]^[3] This renewed interest in Keynes' idea may be considered part of the 2008–2009 Keynesian resurgence.

A world currency moves nearer after Tim Geithner's slip - Telegraph

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Macroeconomics

super-sovereign
reserve currency
China's suggestion –
backed by Russia, Brazil, and India, and clearly aimed at breaking US dollar
hegemony – is making its way onto the agenda of the G20 Summit next week.
'Dollar-dämmerung' no longer looks so far-fetched.
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- China's paper, by Governor Zhou Xiaochuan, is couched in understated language
  – more a 'thought experiment' than a declaration of monetary war. His ideas
  could be mistaken for the musings of an academic theorist. Nobody should be
  fooled by decorum.
- It comes days after premier Wen Jiabow demanded US action to safeguard the
  value of China's holdings of US bonds - $740bn of US Treasuries and a
  further $600bn or so of other debt. "We have lent huge amounts of money
  to the US. Of course we are concerned about the safety of our assets,"
  he said.
- China's proposal is to activate the IMF's power to issue Special Drawing
  Rights (SDRs). The IMF would be groomed as de facto central bank for the
  planet. The SDRs would gradually become an "accepted means of payment".
  Call it the 'globo'.
- It would be an error dismiss this idea as a pipe-dream. Cynics once ridiculed
  Maastricht plans to launch the euro. John Major famously said chatter about
  a European currency had "all the quaintness of a rain-dance and about
  the same potency". Yet once officialdom began assembling the machinery
  for monetary union, EMU acquired a life of its own.
- The pitfalls of a world central bank are obvious. It is hard enough for the
  European Central Bank to run policy for 16 states in a region with a shared
  history, and shared EU institutions (Commission, Court of Justice,
  competition police, etc). The politics of global monetary management would
  be poisonous
- The heads of the Fed, the ECB, and the Bank of England, must all testify
  before parliaments and answer to democracy. There is no world parliament, no
  world government. Who would control a super-IMF?
- In theory, this world reserve bank would be above politics. China's plan
  suggests a resource currency along the lines of the "Bancor"
  floated by Keynes at Bretton Woods. This was anchored on 30 commodities,
  giving it a broader base than the Gold Standard. Such a currency would
  prevent the "credit-based" debauchery of today's fiat system, says
  Mr Zhou.
- True, but this would be jumping from frying pan to fire. If the world is
  running out of oil, metals, freshwater, and arable land – as many believe –
  then the price of commodities must rise over time. The 'globo' would become
  a deflation machine, like the late 19th Century gold as it asphyxiated
  endebted US farmers.
- The China-Russia plans may never come to much. As President Barack Obama put
  it, the US is going through a "rough patch" but still commands the
  world's biggest economy, under a stable democracy and the rule of law. He
  might have added that it will largely avoid the aging crisis already dulling
  Japan's dynamism, and soon to ensnare Germany, Italy, above all China.
- For all its bluster, Beijing must move with care. After years of export-driven
  mercantilism China is even more dependent on US markets than America is
  dependent on Chinese capital. The risks of currency and trade conflict are
  not symmetric. The hegemon must prevail.
- But 10 years hence the picture may look different. If the G20 opens the door
  wide enough next week, a world currency may yet come into being.

Bao Wen Chen's Library tagged macroeconomics → View Popular

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FT.com / Columnists / Martin Wolf - What the G2 must discuss now the G20 is over

FT.com / Columnists / Martin Wolf - Why G20 leaders will fail to deal with the big challenge

FT.com / Comment / Editorial - China slowly grows into its crucial role

FT.com / In depth - China greets G20 results with caution

FT.com / In depth - G20 pledge on SDRs unlikely to threaten dollar

Two cheers for the London G20 summit | G-force | The Economist

China's united currency idea divides nations

Economist's View: "Blame Economists, Not Economics"

Bancor - Wikipedia, the free encyclopedia

A world currency moves nearer after Tim Geithner's slip - Telegraph

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