Thursday, January 28, 2016
Ambrose Evans-Pritchard — Hysteria over China has become ridiculous
Owing to the "impossible trinity" of a maintaining a fixed exchange rate, an discretionary monetary policy, and free cross-border capital flow. China either must impose capital controls or float the RMB.
The later is the obvious choice. This would reduce the cost of Chinese exports abroad and increase the cost of imports, allowing for import substitution.
The Chinese leadership should take a lesson from Russia instead of trying to beat the neoliberals at their own game.
The Telegraph
Hysteria over China has become ridiculous
Ambrose Evans-Pritchard
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9 comments:
Me and Neil have talked about the "Trinity" before, although it was about the Eurozone.
"The key issue with the 'trinity' is running out of foreign reserves.
You only run out of foreign reserves if the other side of the deal refuses to intervene on your behalf. In a mutual peg like the Eurozone the other side automatically intervenes on your behalf. That's what the TARGET2 balances effectively are.
As usual with mainstream analysis they analyse a country in the context of a 'Rest of the World' that acts in unison and against your interest. That isn't necessarily the case. "
"Like all neo-classical economics, it's based upon assumptions about 'rationality' and often infinite liquidity in markets.
But there is an empirical regularity there. What we need to understand is whether that is systemic or simply because nobody has bothered to learn how to turn into a skid."
Should be interesting to see. Why does China not float, and ban bank lending for forex settlement etc, on pain of loans becoming unenforceable in court and a gift of shareholder's funds?
What is the Chinese banking system like Tom? As corrupt as US? A lot is state owned.
I am pretty sure that the state pretty much controls the banking system. It is probably not a corrupt as in the West, where bankers have captured the state, especially now with an anti-corruption drive going on in China. Russia has also instituted as serious anti-crropution drive. In both cases the investigations are led by highly experience and credible people independently of political influence. They seem to be ahead of the West in this regard in recognizing that they have to deal with corruption as a top priority. The West has just swept it under the rug.
In a mutual peg like the Eurozone the other side automatically intervenes on your behalf. That's what the TARGET2 balances effectively are.
In theory it should be automatic, but we now know that in practice the ECB can choose not to intervene - with dramatic consequences (Greece).
A Rest of World acting against your interest is not imho a good characterization of the mainstream analysis. More like the opposite - relying on foreign central banks to prop up your currency is the foolish policy of dependence supported by neoliberalism. The point of functional finance is that its domestic v RoW analysis shows that it works even if the RoW is acting that way; it does not grossly exaggerate the power and importance of the foreign sector as the mainstream does.
Focusing on the ROW instead of the domestic economy is the problem of the Central Bank of Russia. Elvira Nabiullina was named central banker of the year for 2015 by Euromoney for the way see handled the ruble crisis. That says everything about her approach.
"it does not grossly exaggerate the power and importance of the foreign sector as the mainstream does."
It actually plays it down - by admitting that the 'Rest of the World' is not some sort of Deus Ex Machina or Old Testament God bent on vengeance, but lots, and lots of competing economies all after your business.
The important point is that *any one* of the foreign central banks with an eye on your sales can stop your currency falling (as a side effect of stopping *their* currency going sky high, cf. Japan!). It only takes one from all the world's currency zones.
Yet the mainstream treats this all as a blob acting in unison - as if China, Russia, Japan and the USA ever act with one mind.
Well, we completely differ, both on what happens in the real world and what the mainstream vs functional finance/MMT says. The developed and stronger countries & "the nation of bankers" quite frequently do act as gods bent on vengeance towards the weaker countries - viz the EU vs Greece. The rich nations / mainstream's gross exaggeration of the importance of international trade and finance, its insistence on the incapacity of each country to look after itself, is internalized by victims and causes things like Tsipras's surrender at the point of victory.
Deep down, everybody knows MMT/FF is right. When push comes to shove all these countries are not "after your business". They're after your throat. They don't need your business, and they know it. They know boosting their domestic demand is the easiest thing in the world to do without you. Countries ignore this at their peril. Foreign central banks don't ride to the rescue of anybody but bankers.
The important point of FF is that it considers the opposite of this, a worst case analysis. So they go for your throat as the EU did after Greece, as the US after Russia. As long as armies and navies aren't moving to invade or blockade, Abba Lerner says: so what? The normal processes of international trade, bartering for imports with exports, are enough, as long as you stand up to the ROW & focus on your own domestic economy. As Russia mainly does now, as usual with a Central Bank working against it, as long as you don't fold as Greece did.
And as I recall the Greek cb was working quite consciously and intentionally against Tsipras-Varoufakis and for the Troika.
Nabiullina apparently doesn't know any better and is just doing what central bankers do.
Sometimes the line between free expression, activist and outright corruption is kind of blurry.
Mega-activists of extreme forms of conservatism like Greenpeace or Americans for Prosperity throw monkey wrenches into the gears of the political system all the time. I'm not sure their supporters think they are corrupt even though they are primarily the rich elite.
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