Thursday, March 18, 2010

Sideshow Of A Main Show's Sideshow

Note:  Today's post should be read in conjunction with the previous post about Greece.  But if you are too bored to do so, never mind.  It mostly stands alone.

Pardon the mangled syntax of today's title, but  it serves as a hint  to my main point: the Greek "crisis" is just a sideshow - in fact, it's even less than a sideshow.  The whole thing reminds me of those nested babushka dolls from Russia, where one doll serves to obscure the existence of the other.

So, what's the main show? The China - U.S. war for global supremacy, currently being fought on the dollar/yuan battleground. China's cheap currency, administratively pegged at artificially low levels, allows the country to remain the world's ultra-low-cost manufacturing center.  A bottom-rate value for the yuan is completely at odds with China's newfound wealth and power and should, instead, be allowed to move significantly higher, perhaps as much as 50%.  America has finally woken up and is screaming bloody murder..

But America has a problem: its massive budget deficits need to to financed; for this fiscal year alone it comes to $1.6 trillion.  I estimate that at least $1 trillion of that must be provided by foreign investors, since the domestic saving rate is nowhere near what is necessary (it should be over 10% to cover the gap - see chart below).

In the past the U.S. could issue debt almost at will, since it possessed the world's sole reserve currency.  From the inception of the euro, however, this is no longer the case.  The U.S. must  now convince the world  that it should prefer the dollar to price its goods (e.g. crude oil) and to save its excess capital.  It's a battle for hearts, minds and money - and these days this means mostly Chinese politburo hearts, minds and money.

What does this have to do with Greece and the euro? Greece is in the middle of a boxing match between the U.S. and Germany, the EU's heavyweight.  The U.S. financial establishment wants to make clear that the euro is not worthy of reserve currency status and the world should, instead, continue to buy Treasurys.  Germany wants the exact opposite, so it too is being obstinate about bailing out Greece, fearing that such an event would be interpreted as a sign of weakness and lack of monetary resolve.  It's terrible to be caught in the middle, when elephants are trampling about..

Some facts and figures to support my premise:  
  • Greece is a tiny percentage of global GDP.  According to the IMF,  in 2008 it accounted for a mere 0.5% of global output in purchasing parity terms.  Compare this with heavyweights like the U.S. (20%), China (11.5%), Japan (4.3%), India (3.3%) and Germany (3%).  It is ludicrous to attach  overwhelming importance to its, admittedly parlous, finances.
  •  Greek government debt comes to around 300 billion euro.  Let's not compare that amount to other countries but, say, to the assets at PIMCO, the asset management firm specializing on fixed income: $1 trillion.  Or, to the amount the U.S. has already committed to the bailout of AIG alone: around $200 billion. And so on and so forth.  In other words, Greece requires mere peanuts from heaven to put its finances in order.
    • The "Greek Crisis" has been in the headlines for weeks now. A day does not go by without an article in the usual suspects: FT, Bloomberg, WSJ, Reuters - all seem to relish in bashing Greece, or "squashing the Olive" as some less-than-classy commentator put it.  The latest incident came two days ago when Marty Feldstein said: “The idea that Greece can go from a 12 percent deficit now to a 3 percent deficit two years from now seems fantasy. The alternatives are to default in some way or to leave (the euro), or both.”  Yes, that's the same Prof. Feldstein who  over a decade ago said in an infamous essay that the euro's  establishment could lead to war in Europe (EMU and International Conflict, Foreign Affairs Nov./Dec. 1997) Yesterday, even the wily Jim Rogers piped in and said that Greece should be allowed to go bankrupt in order to show the euro means business.
    So what about those babushkas?  The first one we see is a Greek maiden in distress - but when we look inside we find a steely-eyed German frau.  And hidden inside that there is an American cowgirl with a couple of ivory-handled Colts strapped around her waist.  And finally, we find a Chinese lady modelled after the famous laundresses of yore.  She has a thin-lipped smile on her face and says: "No tickee, no shirtee".


      1. sigh.
        I think that you're right about the stakes in the Greek experiment...
        Quoting you... (loosely...)
        With the emergence of the euro as a potential reserve currency (or at least a currency that COULD be used to price..PRICELESS (lol) commodities like oil...), the U.S. government now NEEDS TO CONVINCE the game's other players to purchase U.S. debt (oops, I meant dollars...).
        The key expression is "needs to convince".
        This means that... for the first time IN QUITE SOME TIME NOW (and I'm NOT JUST referring to George Bush), the U.S. government is going to have to cultivate DIPLOMACY instead of.. bullying its way around with those twin Colt revolvers.
        You look pretty silly as a diplomat with revolvers, now, don't you ?
        Better hurry up and take them off quickly before your bluff is called.

      2. Won??? The Korean stuff?

        Or do you mean the Yuan a.k.a. Renmimbi?

      3. re: won

        "That's what I get when I post w/o proof-reading" says he, as a wan smile crosses his face.


      4. I am pretty sure we can nest a few more Matryoshka dolls into this picture pretty quick.

        But be that as we may, if we are to stopping stop our attention on this fractal train at these particular nested levels, ask yourself the following:

        If money is simply a surrogate for trust, faith and cooperation.

        Which maiden in distress do you trust the most? ;-)

        "Heaven has no rage like love to hatred turned / Nor hell a fury like a woman scorned."

        -- William Congreve

      5. Great quote, Thai. You're burning the midnight oil too, huh ? ;-)

      6. Is it a babushka doll, or a marushka?

      7. babushka, matrushka, matryoshka - whatever you call it.

      8. Great post as always but i don't get it; where's the boxing match when both the US and Germany want Greece to default or leave the Euro?

      9. Euro bashing has been a favored US sport since the euro first quivered on the scene. The American press (and the captive FT and Economist) appear to love stories about political infighting and policy disagreements in Euroland, while deliberately looking the other way regarding similar problems in the US.

        I'm pretty sure that the governors of Michigan, California and Mississippi don't agree on everything, but no one asks them their opinion on how the Fed is doing and whether they feel trapped by the dollar currency union.

        The euro isn't falling apart. The European economic model isn't broken. There will be deleveraging pain, but not as bad as many fear.

        Another important point that doesn't get enough play, is that Germany and France do not fear deflation as much as the US and UK do. They fear inflation much more than US and UK do. Deflation makes life easier for a lot of poor and low income people, and stabilises government finances (as long as debt isn't too high). Deflation hurts the richest people most. Germany wants a little pain administered to those who brought on the crisis, so a little deflation is seen as a corrective. Makes sense, really.

      10. I think you need to read the following:

        And in a most welcome development, Mr. Stephen Roach has suggested a novel and constructive use for The Louisville Slugger that involves chief Keynesian miscreant and number one provider of bogus economic cover to the PTB, Paul Krugman.

        As for Greece being a sideshow. Yes and no, as it all depends on how one frames the issue, or if you prefer, what context one places it. The manner in which the Eurozone's leaders, Germany particularly, respond to this state's state of affairs has rather important implications for the entire Euro experiment. Is this bigger than the growing US/China contretemps? No, but neither is it inconsequential.

      11. wouldn't it be to Germany's advantage if the Euro is weak? This will help exports, and Germany is still largely an export driven economy.

      12. The boxing match is between US and China. Germany wants to make sure the euro becomes a main global reserve currency and therefore does not want to see any backsliding on eurozone finances.

      13. The article on China is pure supposition, based on a statement by a Chinese official prior to an official visit to the US. This is exactly what he would have said to combat pressure by the US to revalue the yuan.

        Facts are hard to obtain in China, since the govt. releases few statistics.

        However... they say that love and wealth are hard to conceal.

        Just look at the enormous bubble in urban residential real estate in China: wealthy chinese are paying multi-millions of dollars for ultra-gauche apartments, complete with gold fittings, etc.

        That doesn't come from 2% profit margins, believe me...

        I would rather take the bat to Mr. Roach.

      14. Edwardo, thanks

        Re: who hits who with the baseball bat

        You do have to admit a certain fondness for Krugman.

        Hell, by switching the proverbial bat on Roach, is your beef with him over general gripes with Morgan Stanley and bankers, etc.. in general, or is it over the fact that you think China should revalue?

        And if it is the latter, is your motivation by "Green" concerns as it reduces US/world consumption to something you see as more sustainable? Or is it something else?

        Sometimes tracing the logic steps backwards can be a little daunting.

        Just curious

      15. I have nothing against Mr. Roach, per se - or Morgan Stanley.

        I strongly believe that China is now a guilty-as-hell mercantilist nation, essentially "dumping" goods on the rest of the world. It is playing by a set of rules that do not apply in a free-trade, globalized economy.

        I would have no problems at all with their approach IF the rest of the world could defend itself.

        How about this, China?

        You want an artificially, administratively-set cheap yuan? Fine, no problem at all, AT ALL. But I get to impose a 50% import duty on your goods.

        That's fair and proper, because those are the rules of mercantilism.

      16. The Roach clip is interesting.
        Milton Friedman's zippy world makes me think that current globalization is making us look more and more alike, from one continent to another.
        I agree with London Banker that the European Central Bank is much more concerned about inflation than it is about deflation.
        It is so concerned about inflation that is adopts a religious attitude about the idea of preventing inflation.
        But... in the meantime inflation keeps creeping along in France, and perhaps more importantly, INDEPENDANTLY OF THE STATISTICS, the population THINKS that inflation is progressing.
        And inequality is growing, along with wealth concentration. On all continents.

      17. Thai, my fondness for The Krug is akin to the fondness that Godzilla had for Rodin or Batman had for The Joker, or perhaps, that the Crocodile has for a poor water Buffalo attempting to cross a swollen river in The Serenghetti.

        Confuse us say, by Hell logic, back in the halcyon days when the US was experiencing inordinate residential real estate appreciation, and lovelies like the head of Tyco constructed their own garish monstrosities, they must have been fueled by great profit margins in the economy.

      18. I guess I am still trying to figure out your kin boundaries on this one. For while China uses significant resources to maintain a fix vs. the US dollar, to keep with the Matryoshka doll analogy, isn't this a collection of zero-sum issues nested within zero-sum issues nested still further within zero-sum issues. And the issue you focus on is simply entirely dependent on your point of view and the way you slice these zero-sum issues in a manner that makes them non-zero sum for you:

        1. Isn't China's fix really against the dollar so the Yuan floats when the dollar floats? Don't lot's of other nations do the same thing and either fix against the dollar (e.g. Hong Kong) or actually use our currency like Panama, etc...?
        2. In order for China to remain "undervalued" so to speak, don't they have to commit resources equal to the amount of "undervalue" their currency now has?
        3. Isn't this in effect creating a significant liability for themselves in the process?
        4. Couldn't Yuan undervaluation be viewed as some American consumers as a subsidy by some Chinese Taxpayers?
        5. And the flip side of that coin would be some Chinese and American workers would lose their jobs?

      19. LOL!!!

        Hell, Edwardo has a point. ;-)

      20. "Euro bashing has been a favored US sport since the euro first quivered...".  Yeah, yeah, yeah.  Don't be so sensitive.
        [N]o one asks [ the govenors of Michigan, California and Mississippi] their opinion on...whether they feel trapped by the dollar currency union." No, and it wouldn't occur to anybody to ask. That's the difference between harmonized and unified. Though I wouldn't suggest that unity should go so far as that I from my remote and rural enclave should bail out 40 million Californians who's economy was built on a disproportionate share of federal (unified) spending; water projects, agricultural subsidies, highway funds, defence spending, transfer payments- forgive me if I've left something out. 
        Anyway, Hell. I'm disappointed. You usually do better. I see no parallel in the German surplus to that of the Chinese who have followed a particularly mercantilist development policy and it isn't just the currency. The Chinese market is closed to outside, the currency is not convertable and a domestic policy of "forced savings" which is a subsidy to industry (State Owned Enterprise) is different than the monetary harmonization which did work to the advantage of Germany and less so to some of the other EC countries. But the weaknesses of monetary harmonization without a union among disparate factions is apparent in a different way. Allow me this:

        La parte greca della famiglia has no incentive to do anything other than keep the EC monies - intermediated profitably by la International Banking Cartel parte della famiglia - coming. So they take the euro hostage and threaten Brussels with blowing it up.  And we witness a hostage negotiation tra cugini. Amusing. Aber WonderFrau Merkel glaubt nicht und Setzte Sichuan wie ein Esel mid den fussen nach vorne. The bullshit about legality is risable.
        With deference to London Banker I left out the part about the Chicago famiglia franchise only because it deserves fuller treatment.  

      21. LOL.)
        Once again we see that...
        The politics horse needs to draw the economic cart or the main show never budges.
        Marco Polo's comments about California remind me that... it's not cause you THINK you already got a union that you can stop paying attention to what's federating your show, and while I see NOTHING political (i.e., in terms of ideals, and not even language..) federating the European show, I see the American "union" kind of petering out faster and faster.
        It would be interesting to see what happened to the AMERICAN union should California and other so called united states on about parr with Greece be called out to pay.
        Very interesting...

      22. Debra,

        Remember Ford to NY City, ca. 1975?
        "Drop Dead".

        There's an old saying.. it's when things get tough that you find out who are your real friends.

        Federations go swimingly when everyone's fat and happy. But, since the dawn of time, when hunger stalks the streets it is everyone for himself and herself.

        Ahhh.. such a thin veneer is civilization over bestiality..

      23. Your last statement, Hell, is an expression of the prejudice that our slanted reading of Darwin has inculcated in us concerning the way "nature" works. (But that slanted reading is just a disguised restatement of Judeo-Christian beliefs about man's place in the natural world.)
        Bestiality opposed to civilization ?
        Auchwitz looked pretty sophisticated in certain ways for the time, of course.
        Mass murder was brought about in an industrial fashion. Organized to a certain extent like an accountant sheet, while we're at it.
        Nothing... bestial about that. (The beasts don't do things that way.)
        That's.. CIVILIZATION for you.

      24. Thanks for the link, Thai.
        An incident that happened in January, 2008 and is coming before the Supreme Court in 2010.
        Two years is a long time in the life of a teenager.
        Thank God we don't ask that court to deal with emergency situations TOO often, huh ?...
        Zero tolerance anything is a big piece of demagogic shit.
        But.. it sure sounds good. Tempting.
        A quick way to "solve" recurrent social problems when your patience has worn thin.
        Punish the hell out of everybody.
        A little bit like... shooting everything that moves, right ? ;-)

      25. I think the Greek govt debt problem has nothing to do with the USD RMB debate.

        Greek govt debt is part of a larger problem which is that Portugal / Ireland / Greece / Spain got a total of $2 trillions of debt they now owe to european banks.

        Now that's a lot of money for a population of approximately 70 million people and perhaps 40 million workers.
        I would estimate that at about $50,000 debt per working person, and annual interest payments of $2000 to $3000 per person.

        Why would these workers pay back (in taxes) 10% of their income over the rest of their lives?
        And what happens if they don't pay back?

      26. The US needs to borrow more this year than all the rest of the world combined!