04.30.09
Posted in Latin America, Negotiating, Obama Administration, Trade Policy at 4:20 am by Administrator
The recent Summit of the Americas in Trinidad marked a positive change in US attitudes towards Latin America. Much has been made of the interchanges with Hugo Chavez but the real story is that the Obama Administration has decided to approach Latin America as an equal rather than the big brother (bully?) to the north. I suspect that in the long run the new stance will do more to undercut the likes of Chavez than all the bully tactics of the Bush Administration.
The one country absent from the gathering of hemispheric leaders was Cuba. There have been some movements by Cuba on loosening the grip of the dictatorship since Raul Castro took over from his brother Fidel and Obama responded by allowing greater contact between families in the US and Cuba. Obama is wisely playing a shrewd negotiating game by giving small concessions. I think the small steps will lead to wide fissures that will result in a return to democracy. Whenever democracy arrives in Cuba, it take place in a relatively short time and from within (not caused by external pressure). The US embargo policy lost its effectiveness decades ago but it can still be traded away for reforms.
The last important result of the Summit of the Americas was that the Obama Administration placed itself squarely in the camp of preserving free trade. As we face the worst recession since the Great Depression, the lessons of how protectionist measures (Smoot-Hawley bill) prolonged the Depression have not been lost on the Obama Team. USTR Kirk announced that the US would not seek changes in the NAFTA agreement and would push for ratification of the draft Free Trade Agreements with Panama, Colombia and South Korea. These are all good agreements and we should urge our Representatives and Senators to approve the measures. In this global economic downturn, we need to reaffirm the need for open global markets that will promote economic recovery.
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12.29.08
Posted in China, Economic Analysis, Exchange Rates, Obama Administration, Trade Policy at 6:49 am by Administrator
The New York Time has been running an oustanding series entitled “The Reckoning” which explores the causes of the global economic crisis. I recommend the one published this week entitled “Chinese Savings Helped Inflate American Bubble” by Mark Landler. Landler pointed out how Chinese money (from the huge export surplus due to the fixed exchange rate policy) helped the US run a risky economic policy (sharply expansive fiscal policy fueled by large deficits at the same time as an expansive monetary policy from a low interest rate policy). The first to write about the phenomenon was a leading economist (guess who?). Landler starts off the article:
In March 2005, a low-key Princeton economist who had become a Federal Reserve governor coined a novel theory to explain the growing tendency of Americans to borrow from foreigners, particularly the Chinese, to finance their heavy spending.
The problem, he said, was not that Americans spend too much, but that foreigners save too much. The Chinese have piled up so much excess savings that they lend money to the United States at low rates, underwriting American consumption.
This colossal credit cycle could not last forever, he said. But in a global economy, the transfer of Chinese money to America was a market phenomenon that would take years, even a decade, to work itself out. For now, he said, “we probably have little choice except to be patient.”
Today, the dependence of the United States on Chinese money looks less benign. And the economist who proposed the theory, Ben S. Bernanke, is dealing with the consequences, having been promoted to chairman of the Fed in 2006, as these cross-border money flows were reaching stratospheric levels.
As I blogged previously, the US consumption binge was fueled with Chinese money. The trade policy of a fixed exchange rate allowed China to price its goods aggressively in the US markets. China however had to sterilize the inflationary effects of the export surplus by buying up the excess dollars. It then invested those dollars in Treasury securities, even though the Fed was keeping US rates low. (Other Asia export-oriented countries did similarly with their surpluses, although at a much smaller scale.)
The US made its share of economic mistakes as well. The Bush Administration started two wars without raising taxes, relaxed financial regulation and supervision and took advantage of the Alan Greenspan’s low interest rate policy. In the ensuing party, the banks gave away mortgages to just about anyone, causing a huge housing bubble. Unfortunately, US policy makers focused largely on the domestic US market, and thus they missed the “blinking red light.” The US inflation indicators excluded the wealth effects of higher stock indices and higher housing prices. Without those two components, inflation looked under control, especially in the consumer goods portion of the CPI where Chinese imports kept down prices. The little that US policy makers looked at international issues was with regard to the euro/dollar or yen/dollar relationship.
One lesson that has to be learned is the US is inextricably entwined in the world economy and that it no longer sets the agenda. It can play a leadership role if it chooses to participate in the game. The incoming Obama administration has the intellectual horsepower to make that mental shift. My New Year’s wish is that the Obama administration will formulate its economic policies with a global vision.
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