China’s currency devaluation took Albert Edwards a step closer to realizing his doomsday prediction: deflation spreading from Asia to the U.S. and Europe and sending economies crashing.
Tumbling emerging-market currencies will now accelerate their declines, curbing import costs in developed nations and triggering a broad drop in prices that will undermine economic growth, according to Edwards, the top-ranked global strategist at Societe Generale SA.According to Edwards, "this is the start of something big, something ugly.” While I would agree that t this is a big move, it is hardly the start. Deflationary pressure began building at the time of the 2007 financial emergency that morphed into a full-blown financial and economic crisis that threatened the global economy and was narrowly avoided. However, there has been no significant recovery, or anaemic one at best.
The bursting of the commodity bubble that Randy Wray and others like Jeremy Grantham predicted some time ago has taken hold with a vengeance, especially with oil still testing the bottom. Bell-weather copper is crashing, too.
The neoliberal and neoclassical preference for austerity as economic policy is creating severe drag on the economies of many developed nations, in particular the Eurozone. Political instability is also rising in the developing world.
Japan and then the Eurozone adopted QE for a variety of reasons but one effect, certainly anticipated was a weakening of the yen and the euro. Both Japan and the Eurozone typically strive to run a mercantilist policy emphasizing net exports and fiscal surpluses.
Concurrently, the USD has been rising as a safe haven, with the US not only the largest economy and most powerful nation politically, but also recovering better than most, not to mention the Fed beginning to raise the interest rate soon.
As a result, China also saw its currency rising, the renminbi being pegged to the USD. China has also been running a mercantilist policy as a new exporter and began to see its exports shrinking with yuan getting relatively more expensive.
Thus, China recent action has been defensive and should have been expected, although it seems to have caught markets by surprise.
Nevertheless, the size and influence of China as a global exporter reducing the cost of its exports by currency devaluation is going to have a further deflationary effect.
The global economy is experiencing a huge demand deficiency problem, which is especially dangerous where there is also elevated private debt or there is a balance of payments issue in USD with dollars becoming more expensive relatively.
The deflationary pressure is now being noticed. If it took China's move to call attention to it, that's a good thing. Without acknowledging the challenge, the situation is likely to "ugly," as Edwards writes.
It's long overdue to address the demand deficiency and debt overhang with fiscal remedies instead of relying on monetary policy that has shown itself to be ineffective. It's also time to confront the erroneous assumption that neoliberalism is the only alternative. As Margaret Thatcher put it, "There is no alternative."
There is an alternative, and Keynes set it forth in the midst of the Great Depression. It's past time to listen to him again.
However, we have come a long way since Keynes was writing and advising governments. Post Keynesianism and MMT have articulated those insights and taken them further. There is no time to lose in addressing real challenges with effective solutions that have been shown to work historically instead of imaginary issues with speculative cures that don't have a good track record empirically. We need to do this before things get ugly.
Deflation Ice Age Looms After Yuan Move, Albert Edwards Says
Adam Haigh and Jason Clenfield
24 comments:
"The neoliberal and neoclassical preference for austerity as economic policy is creating severe drag on the economies"
Combined with the demographics.
And China going basically cold turkey on their infrastructure addiction.
"The bursting of the commodity bubble that Randy Wray and others like Jeremy Grantham predicted some time ago"
This is not insightful.
Everything is a function of the oil price.... OPEC monopoly rents have been being reduced by the surge in non-OPEC production so our US real terms are being increased....
China drops the price of their steel exports by 20% in USD terms and nobody even notices. .. then when the banks who leverage financed the inventories have to adjust their exchange rate by 2% everybody throws a shit fit...
The USD terms have already been adjusted by the merchants well before the exchange rates are THEN seen to be adjusted by the financiers of the trade...
If Daimler were to suddenly drop the MSRP of a C-Class from current $38k to $30k .... THEN we would see a crash in the EUR follow. ..
http://mobile.reuters.com/article/idUSL3N0ZN2MU20150707
This is already old news by the time it has to start showing up in exchange rates...
Matt very insightful, have to admit you may be onto something here, but I still believe there are a lot of moving parts and the causation is not as clear as you imply. For example carry trading and arbitrage had a big effect on exchange rates for a good while.
With the liberty of capital to move the 'hotness' and 'coldness' of monetary regions have an impact on the demand for assets nominated in a certain currency driving prices up or down. Portfolio management, investment decisions etc. It's not a single cause, but certainly it seems to have a big effect over the short term.
Anyway, on deflation, yes, is unavoidable and we have been on a deflationary era since a few years ago, not going to change. This would be excellent news if we were not governed by idiots. We could use it to tackle environmental issues, energy sustainability and implement rational policies about ageing population, reduction in consumption of physical goods and acknowledging a brilliant future were most jobs will be automatized, efficiency will be high, and waste reduced, while discussing how to lift the ever-developing nations to decent standards of living. All because we can completely afford it (from a REAL pov) as deflation demonstrates.
But instead we have to deal with stupidity everywhere that we are running out of money and our childs won't be able to afford things we are producing NOW (?!?!?!).
>"The bursting of the commodity bubble that Randy Wray and others like Jeremy Grantham predicted some time ago"
This is not insightful.>
The prediction of a shift from a longterm bull market in commodities to a bear. So we'll see how that works out. Too early to tell yet.
Matt very insightful, have to admit you may be onto something here, but I still believe there are a lot of moving parts and the causation is not as clear as you imply. For example carry trading and arbitrage had a big effect on exchange rates for a good while.
With the liberty of capital to move the 'hotness' and 'coldness' of monetary regions have an impact on the demand for assets nominated in a certain currency driving prices up or down. Portfolio management, investment decisions etc. It's not a single cause, but certainly it seems to have a big effect over the short term.
Right, lots of factors. And portfolio shifting not only happens fast but there is also a herding effect as everyone rushes for the door.
"Capital moving....."
This is metaphor. ...
When people say this they then start to measure quantity and NOT price. ...
They will look at international positions and see a delta from t1 to t2 and say "capital moved!" : NOTHING has moved.
(Real goods have moved BUT at what PRICE???)
MMT Insight: "Its about price NOT quantity "
This insight is NOT being consistently applied by MMT people. ....
Rsp
"Capital flight" means that sell orders swamp buy orders owing to a shift in expectations, and markets react by falling, e.g., equities, currencies, etc., are affected. The idea is that markets ordinarily clear within a band that accords with future expectations. When there are more buy or sell orders than sell or buy orders owing to changes in expectations, Then markets move up or down as the case may be.
This affects interest rates also as the central bank tightens to make the currency and debt more attractive to investors to circumvent selling. This is what Nabiullina did and astute traders profited from this when the ruble dropped from its previous band in the forties to touch the eighties and then rebound back to the fifties.
The Central Bank of Russia then loosened and the ruble fell back toward the sixties, where the cb seems to want it to encourage exports, in particular the arms industry. Similarly, the interest rate on Russian bonds is now very attractive and investors who are betting that Russia doesn't repeat the mistakes of 1998 are buying. so it looks to me like selling pressure is managed at this point and buying is picking up.
In addition, pressure is being brought on the oligarchs who parked assets in London, for instance, to return their assets for investment in Russia. While there isn't strong arm-twisting and the appeal is patriotism — coming to the aid of Mother Russia — no one doubts that the authorities are taking notes that will affect future government actions, like who gets contracts.
Russia is certainly not being run on MMT principles but there are better and worse ways otherwise. I think that Russia surprised the US in meeting the dual challenge of falling oil price and sanctions. The US seems to have believed that Russia would cry uncle and leave Crimea, and possibly even replaced Putin.
Regarding China, "foreign capital" as financial investment is "slowing its motion" into China in the sense that the rate of FDI is declining. There is no exodus of foreign capital to speak of, but the inflow of investment in Chinese companies has slowed somewhat owing to the rebalancing that the Chinese leaders have instituted.
China has responded by 1) weakening the currency wrt to the USD, since it had grown to strong relatively owing to the peg, and 2) further liberalizing FDI with foreign companies allowed to hold a larger share than previously.
China not only gets the foreign financial investment but also technology and management know-now, which it needs much more than funding. And foreign companies get a toehold in the Chinese markets at the ground floor.
Where "capital flight" is occurring is with wealthy Chinese "diversifying" abroad. This puts downward pressure on the RMB as they sell yuan for other currencies.
Exactly. Nothign moves, but you sell an asset denominated in one currency (ie. dollars) and buy an asset denominate din other currency (RMB). hence the price changes as you sell dollars and buy RMB.
OFC the dollars stay within the dollar-zone and the RMB stay within the RMB-zone, where else could they go? No where obviously. But this pushes the price one direction or other.
I agree that is poorly worded, there is no move or flight, is a metaphor, but the fact is that it pushes the price of a currency up or down as there is a transaction in a pair of currencies.
Prices are not just due to the consumption flows (an exporter reduces the price of a good to sell more units in one currency zone), but also to investment position (in order to increase production or expecting some asset appreciation a capitalist shifts its portfolio, selling assets in one currency zone and buying assets in other).
Is not just one thing acting on the exchange rates.
In effect (and as you say Matt) everyone outside the United States is putting their products/commodities/labor on sale but the only place where we actually see those price reductions showing up everyday is at the at the Mobil or BP station. You sure don't see them in the price of an airline ticket, that's for sure.
If we wait till price reductions from gasoline, oil, et al, ripple through the rest of the economy, we could be waiting a very long time before we see demand build again. While we wait for that downward price ripple to take hold more and more people lose skills because they are not able to use them to earn an income which in turn causes turmoil in families with children who don't pay attention in school because mom and/or dad aren't working. Perhaps they are working but need two or three jobs to not even replace the higher paying one they used to have.
We just continue to lose one generation after another from our practice of 20th century economics in a 21st century, technology-centric world. Sad.
Robert Skidelsky had a good piece that helped me better understand the effects of deflation called The Price Paradox: http://www.project-syndicate.org/commentary/monetary-policy-inflation-impact-by-robert-skidelsky-2015-02
I still say you have it wrong when one takes the metaphor too far and start to think of "flow" in real terms...
A flow can be a delta in a level measured per unit time but then you can't start thinking "something flowed" after you take the measurement of delta two financial balances and divide by the delta T....
Nothing flowed!
And we are not getting "deflation" either this is another metaphor used by idiot economists who can't control the metaphor once it is out there.. they start thinking something is "deflating " ... like "prices are deflating!".... NO! Chinese merchants have lowered their prices in USD terms in order to gain market share and move products out of inventory.
Nothing is "flowing " or "deflating " these are idiot economists terms.... if you want to understand what is really going on stop using terms like these metaphors idiot economists copied from physical sciences. ..
We just continue to lose one generation after another from our practice of 20th century economics in a 21st century, technology-centric world. Sad.
Centuries are mixed up here. So far, 21st century economics has been a regression to the 19th century, but in very different conditions that make 19th century economics far less applicable & scientific now than it was in the 19th century. A richer world can afford to be irrational. The economics of most of the 20th century in most of the world was a social technology clearly superior & smarter than today's. We should just move forward / backward to an improved version of it- MMT. Science, technology, mathematics, philosophy, economics do regress occasionally, at least outwardly, for practical, immediate purposes. One only hopes it is always reculer pour mieux sauter.
Metaphors can be confusing when taken literally. Instead of using the phrases "capital flight" or "capital flowing out," it would more accurate to say that divestment and reduction in saving is taking place one currency zone, decreasing demand for that currency in the market, decreasing demand for that currency in the market, and correspondingly increasing saving or investment in another zone, increasing demand for those currencies.
Of course this is happening all the time in both directions in many if not most currencies, but "capital flight" indicates a significant predominance of selling in asset markets and exchange of savings in a currency for other currencies in high enough volume and short enough a period to make a noticeable difference in markets and it may also be accompanied by economic changes in that currency zone as well in both financial and real terms.
Matt, but costs 6 months(t1) ago were higher than they are 6 months later (t2). There is a measurable cost delta between t1 and t2. Are the Chinese, Germans, et al, able to lower their sell price because component commodities costs are now lower or is their sell price a loss leader because it is based on a higher component costs from 6 months ago? Look at the airline industry, will airfares go down when lower cost futures contracts for jet fuel go down?
Sapiens no loss leader.....
Daimler COULD sell the C-class for $30k and STILL make $$$... oil was $100 a year ago now at $50 firms are not going bust they are still pumping... monopoly rent being removed but NOT profits...
I just saw Southwest from BWi wdirect to Costa Rica for $147...
Its complicated. .. Delta Airlines OWNS a refinery in the Delaware basin for instance. ..
Dont look atcthe futures prices look at the prices the firms are actually paying... when THOSE prices move THEN watch what happens to the forex rates.
Rsp
Calgacus, my reference to 20th century economics really references the gold standard pre-1931 and Bretton Woods pre-1971. In the 21st, I believe you are correct, we need an MMT informed economics. In my opinion, an MMT informed economics has the human being has its monetary standard, not gold, $USD, or some other commodity.
If a human being--a citizen , is the monetary standard in any national economy than the managers of an economy need to make sure that a citizen is healthy, educated, and financially secure. The US does a lot to make people believe that its citizens are important but then growing income inequality indicates that isn't true. Public relations efforts in the US masks inequality through myths that entrepreneurial verve gives everyone the chance to get on the world's $USD billionaire scoreboard.
In the 20th century, we had a manufacturing, mostly manual-based labor force and in the 21st century we have a service-based labor force. However, that service-based force can be a doctor, attorney, accountant at the high end of the income scale or a restaurant worker, department store clerk, or insurance customer service agent at the low end. It is those low end wage workers who should become the new middle class in the 21st century. Just like in the 20th century, when the Ford assembly line worker was part of the economic backbone of America; its middle class.
Through automation technology, most all of the assembly-type, manual-based labor of the past has been eliminated but the gains from that automation have mostly been distributed to management executives, shareholders, and technologists (software programmers, hardware designers, et al). Technology is good but not if the eliminated manual labor force is not repurposed into new careers that pay them enough to live and buy products created by a 21st century, automation-based economy.
Machines don't buy products. If our 20th century economics continues to degrade the human labor force (less healthy, educated, and financially secure) then eventually there is no one left to make, fix, or have the time to think of new entrepreneurial ideas.
As you say, maybe we are in a regressive phase before we progress again. I hope so. I get the feeling we are close to that progressive change because there is a lot of discontent in US and around the world. Sanders and Trump are just two examples of that discontent.
"If a human being--a citizen , is the monetary standard in any national economy than the managers of an economy need to make sure that a citizen is healthy, educated, and financially secure. The US does a lot to make people believe that its citizens are important but then growing income inequality indicates that isn't true."
This is the antithesis of democracy (self-governance of the people) and capitalism (prioritizing ownership of private property over people and the environment).
There is no way to fix this antithetical relationship which is contradictory other than by removing the contradiction through adopting capitalistic oligarchy or socialistic democracy. The present arrangement is capitalistic oligarchy going by the name of liberal democracy, which is just a sham for the ownership class to dupe the rubes.
Put people first, which means distribution for wealth and consumption is prioritized, then the environment by ceasing to socialize negative externalities, and finally control of the means of production and growth.
The objective needs to being living a good life in a good society for all in a healthy sustainable environment and thriving ecosystem, and
continuation of above.
…and using the economic system as a means to those ends, instead of an end in itself.
I couldn't agree more Tom. We live in a world of contradictions and dissonance. A country regresses, becoming more uncivilized under oligarchic capitalism and the opposite is true for social democracy.
The problem it seems to me is our language. It is just not precise enough. We use words that can have more than one context or meaning, e.g. liberal, socialism, capital, et al. Liberal economics is not the same as liberal politics; they are opposites. Democratic socialism is not the same as state socialism. Lastly, financial capital does not truly account for the value or waste of human and environmental capital which creates the financial units in the first place, just as you said.
The Rectification of Names (Chinese: 正名; pinyin: Zhèngmíng; Wade–Giles: Cheng-ming) is the Confucian doctrine that to know and use the proper designations of things in the web of relationships that creates meaning, a community, and then behaving accordingly so as to ensure social harmony is The Good.[1] Since social harmony is of utmost importance, without the proper rectification of names, society would essentially crumble and "undertakings [would] not [be] completed." [2]
Confucius believed that social disorder often stemmed from failure to perceive, understand, and deal with reality. Fundamentally, then, social disorder can stem from the failure to call things by their proper names, and his solution to this was the rectification of names.…
The Rectification of Names means that "things in actual fact should be made to accord with the implications attached to them by names, the prerequisites for correct living and even efficient government and that all classes of society should accord to what they ought to be".[4] This essentially means for every action, there is a word that describes that action. The belief is that by following the Rectification of Names, one would be following the correct/right path. The rectification of names also calls for a standard language in which ancient rulers could impose laws that everyone could understand to avoid confusion. Without the rectification of names, different words would have different actions.
Each person has a social standing and a social name and with their social names comes responsibilities and duties. Ruler, minister, father and son all have social names therefore they need to fulfill their required social duties of respect (The rectification of names).…
Of course, the rectification of names in ancient China would be much different from that in liberal democracies today, but the principle remains the same.
Plato: The sophist runs away into the darkness of not-being, feeling his way in it by practice,1 and is hard to discern on account of the darkness of the place. Don't you think so?
Theaetetus
It seems likely.
Stranger
But the philosopher, always devoting himself through reason to the idea of being, is also very difficult to see on account of the brilliant light of the place; for the eyes of the soul of the multitude are not strong enough to endure the sight of the divine." [divine = universal]. Sophist 254a-b.
Most conventional political theory and associated political economy is sophistry designed to dupe the rubes. Nothing new see here.
Tom, you're quite correct. I would distill what you wrote into this short definition for "rubes": Those in Plato's cave watching shadows on the wall. ;)
Exactly, It's not only being in the illusion of constructed "reality" but also being deluded within it by manipulation.
Post a Comment