Kicking Dubya when he's up. Why it's time now to "do windows." (From The Founder).
Today information is arbitraged by markets not over days and weeks but within hours. Today's Treasury Secretary (the ultimate market "horse whisperer") is now a premier actor on a highly leveraged, information-driven global stage. It is a stage in which capital flows heavily drive trade flows, often based on short-term perceptions of the future provided by policymakers themselves.
Looking back, if the Bush team has made one mistake, it is to see the top Treasury job largely in domestic terms. Too often the important global questions have remained unaddressed, ignored by an attitude that says as far as international economics and the dollar are concerned, "We don't do windows." Consider a few of the many questions the new Treasury chief must confront:
* Are Chinese-bred deflationary pressures becoming a dangerous, destabilizing global force? To be sure, Chinese companies themselves lack global reach. But are European, Taiwanese, American, and particularly Japanese firms another matter as they use China with its virtual zero marginal labor cost workforce as a manufacturing base and inevitably export deflation? Recently, even a large firm in Mexico closed its doors and moved to China. The reason: a labor cost of $2.00 versus $3.50 per hour.
The problem here is not Chinese labor but the lack of much of a central bank response to this shock to the system. Instead of adjusting to the global benefits of a large price decline, the international central banking community, with the exception of Alan Greenspan, appears to have failed to adjust the system adequately to this new reality.
Then there is the question of the Chinese currency itself, still tied to the U.S. dollar. With the world's second largest economy described now as being "hollowed out" by low-cost Chinese competition, and with Tokyo in response tempted to try to drastically depreciate the yen against the world (which risks undermining the banking structure; see below), wouldn't it make sense first to examine whether the Chinese currency is grossly undervalued?
* Isn't the Japanese bank problem simply too big to fix short of a severe weakening of the yen? Officially, the talk is of a [yen] 10 trillion bank balance sheet problem as various protagonists (Heizo Takenaka being the latest) bring their bank bailout plans to the stage. Yet no one really knows the problem's true magnitude, with the number talked about privately being a lot closer to [yen] 100 trillion. That means a) no taxpayer-funded scheme of any amount has much chance of success, so all Japanese financial officials have been doing the past decade is playacting at solving the problem; and b) probably the only "way out" for Tokyo is serious yen depreciation, at least to the range of [yen] 160-180 against the dollar. In other words: a Japanese-style Plaza Accord.
Yet Japanese institutions in general and the banks in particular are chock full of long-term government debt. The mantra of the past decade has been, "Why lend for a certain loss when you can buy government paper for a small but certain profit?" So wouldn't dramatic yen depreciation collapse the long-term government debt market and all but force the temporary nationalization of the banking system, if not the collapse of the current public and private ruling regime? Is the world ready for such dislocation? Is America's struggling manufacturing sector ready for a weak yen?
The U.S. economy has prospered despite its massive, ever-growing current account imbalance precisely because competitor economies have been running around the global economic track at a slower speed. What if in several years the situation reverses, with the United States caught, say, with a current account imbalance in the 6-7 percent range and a weakening relative growth position? Wouldn't interest rates skyrocket and produce a downward spiralling weakening effect?
* Is the world prepared for Europe to move itself slowly away from the capitalist model? It sounds absurd but nothing about the Continent today seems stable. Indeed, the current joke in international circles asks: Which will happen first? Tony Blair's entry into European monetary union ... or Gerhard Schroder's exit? At the European Central Bank, voting members representing 19-20 percent of European GDP (the small high-growth economies) are in the absurd position of holding a majority voting block in monetary policy decision making. In other words, large countries such as Germany are left bleeding in the ditch while the ECB worries about a too-accommodative monetary policy.
Demographically, Europe over the next fifteen years will also likely find itself even more competitively disadvantaged, with a shrinking population and a continued resistance to immigration. In the end, does subpar Europe economic performance, dragged down particularly by a Germany refusing to engage in much of a restructuring effort, matter? Does it matter if Brussels takes even more control over the financial and trading systems, tempting imitation by governments in other areas of the world?
* Does it matter if London replaces New York as the financial capital of the world? Clearly, the recently passed Sarbanes-Oxley legislation to clean up the U.S. accounting system was well-intentioned, despite being slapped together quickly by young staffers on Capitol Hill. The abuses to the system were simply too ugly to ignore. Moreover, New York as a financial center is hardly about to vanish.
Yet in the end will some of the excesses of Sarbanes-Oxley have produced the unintended consequence of reducing risk taking, of killing the golden financial goose of the 1990s that laid the golden eggs? After all, the NASDAQ is a wonderful stock exchange, but is it so terribly wonderful that corporate decision makers, with an eye now to their personal liability in balance sheet matters, would never consider alternative venues, especially without some type of corresponding tort reform to prevent the trial lawyers from engaging in a feeding frenzy? Executives now talk of being inundated by 800-question government surveys tied to relatively routine decisions. Put another way, is risktaking in any economy a phenomena in virtually limitless supply?
* Does it matter who's Treasury Secretary? Markets know that Washington always retains the ability to string together a set of policy proposals--tax cuts or whatever--to deal with the economy. But isn't the real question whether the President and his team can come up with a BIG IDEA to define, economically speaking, the current decade? Markets crave, and trade off of, predictability (and at times events in variance temporarily with a perceived predictability). In the 1980s, Reaganomics, like it or not, provided that sense of direction for the decade. In the 1990s, the Rubin economic agenda, again like it or not, provided the same sense of predictability. Isn't the question now whether the new Treasury Secretary can turn prose into poetry and provide a "big idea" style of economic leadership? It's happening on national security issues, as the President's team defines a long-term war against terrorism in terms of reshaping the entire Middle East. Why not some big thinking on the economic front?
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|Author:||Smick, David M.|
|Publication:||The International Economy|
|Date:||Jan 1, 2003|
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