China is the big new bogeyman. How do we deal with China? How did we deal with Japan? Japan was going to buy up the United States. Japanese manufacturing was invincible. The Japanese worker was an incredible perfectionist machine. You could not compete with that kind of perfection. So we learnt Kaizen, JIT and a whole lot of other BS. But in the end, Japan just fizzled out. No world domination.
Why is China different? China is a communist machine. China does not play fair. The Chinese use state funding and cheap slave labor to over produce goods and flood world markets (mostly American markets). Well whose fault is that? Do we actually need to wake up at 4am and stampede over living people to get that Tom Tom GPS for an additional fifty bucks off ? Just pay the additional fifty bucks. Or better still just use the Rand Mcnally Atlas. It is a lot more fun than the GPS.
But regardless of the people’s incorrect priorities, we do have two opposite economic models selling goods in the same market. We have a Capitalist consumer that is supposed to consume the maximum amount of output (irrespective of whether they need all this junk) versus a Communist model of production where the goal is to simply produce goods without regard to profitability. The Communist machine has no shareholder Accountability, no cost of research, no payroll taxes. Nothing. All it needs to do is over produce everything and run all other competition out of business.
It is the same as letting hedge funds play in the same market as Mutual funds. One group has no rules and no restrictions and the other has so many restrictions that they can barely move. So one wins and the other loses, as the game is not fair.
So the answer we need is to level the playing field. We can continue to cry about the currency manipulation. That is not going to help, because we do not control the currency markets. So the answer is to raise tariffs on Chinese goods. Use the tariffs to subsidize our manufacturing and over produce goods to offset the drop in supply from China. Use regulation to force companies like Walmart to buy at least fifty percent of their goods from US manufacturing. This will be a temporary fix but it will give the Chinese a clear message that the US is serious about fixing the asymmetrical trade equation. Also, we can use technology to become more efficient low cost producers.
The other option is to leave things as is and wait for a natural change in Chinese consumers. As the Chinese become richer, they will consume more. This is already evident in the over-heated real estate market in Shanghai and other places. There is absolutely nothing to indicate that the Chinese consumer is any more sensible in their consumption than the US consumer. As consumption increases in China, the pro democratic and other social movements will weaken the Communist machine. So there maybe a natural end to this bogeyman. Do not panic just yet.
Friday, November 26, 2010
Why is QE (Quantitative easing) not working ?
Banks are not lending. Why are Banks not lending – because they can (not lend). Banks can afford to not lend, atleast for a while. Banks are very contra useful entities. They will lend when you do not want them to lend and they will squeeze out all access to liquidity when you need it the most. Very perverse, but that is just the nature of the beast.
Ok so to go back to basics. Banks create money. Money is not longer just the total supply of paper money. Money is the number of times this stock of money circulates. This is the infamous bank multiplier, where the bank keeps a small fraction in reserve and lends the rest of the money out. So the same stock of money expands to none or 12 times (whatever is the multiplier). So now we have the opposite problem. Banks call in their loans and keep the money, to shore up their capital. So our money supply is contracting, by several multiples. It does not matter if you reduce interest rates to zero. The banks are not going to lend. People are not going to borrow.
So now that interest rates are zero, we have to look for new tricks. The new trick is quantitative easing. The Treasury issues Bonds. The Fed prints money and buys the Bonds. This increases the stock of money. But that does nothing for the multiplier. A little extra paper money floating around is not going to offset the contraction resulting from the Banks calling back their loans. At the same time we have regulators asking the Banks to increase their cash reserves – the exact opposite of what we need the Banks to do now! As usual we bolt and lock the stable door securely after the horse is several miles away in the next town.
Basic fallacies. The President can create jobs. Why and how did we ever get this notion that the President is supposed to create jobs. Can you go back in history and point to one President has had a real impact on the economy ? Sure all of them have claimed to create jobs. But that is just political rhetoric to get elected. Nobody should take this kind of claim seriously. If any of the Republicans are going to point to their god Ronald Regan as having created jobs. Please! Ronald Regan is the man who along with Maggie Thatcher sold all your jobs to China. Sure it made his economic numbers look good, but we are all paying the price of that genius thinking.
Second fallacy. The Fed chairman has a magic silver bullet to kill the ghost of Recessions. Alan Greenspan was a fake shaman who played to the CNBC galleries. The truth is that the Fed chairman can only do so much with monetary policy. The Fed cannot make the Banks lend. Only the Banks can create money and only the Banks can make other banks lend.
So what is the answer great one ? Will we never see the end of this economic funk and see happier times ? Of course we will. There is a natural order of things. As prices fall, they will hit a bottom. People will wake up one morning and say, the heck with it, let me go out and borrow and start buying things again. They just need confidence that the world is not ending today. Soon the banks will run out of accruals on their old loans and need to lend again. Some upstart bank will figure out they need to get on top of the rankings by lending more aggressively. And everything will work again – magic!
So Mr. Bernanke my advice to you is don’t just do something. Stand there and let things take their natural course. And Mr. Obama I know things may not come up to speed by re-election time. But there is squat you can do about it. Easier to take a step back and talk sense to the sensible part of the population. Get the fear index down. And don’t make silly promises that you will not be able to keep. You should be just fine.
Ok so to go back to basics. Banks create money. Money is not longer just the total supply of paper money. Money is the number of times this stock of money circulates. This is the infamous bank multiplier, where the bank keeps a small fraction in reserve and lends the rest of the money out. So the same stock of money expands to none or 12 times (whatever is the multiplier). So now we have the opposite problem. Banks call in their loans and keep the money, to shore up their capital. So our money supply is contracting, by several multiples. It does not matter if you reduce interest rates to zero. The banks are not going to lend. People are not going to borrow.
So now that interest rates are zero, we have to look for new tricks. The new trick is quantitative easing. The Treasury issues Bonds. The Fed prints money and buys the Bonds. This increases the stock of money. But that does nothing for the multiplier. A little extra paper money floating around is not going to offset the contraction resulting from the Banks calling back their loans. At the same time we have regulators asking the Banks to increase their cash reserves – the exact opposite of what we need the Banks to do now! As usual we bolt and lock the stable door securely after the horse is several miles away in the next town.
Basic fallacies. The President can create jobs. Why and how did we ever get this notion that the President is supposed to create jobs. Can you go back in history and point to one President has had a real impact on the economy ? Sure all of them have claimed to create jobs. But that is just political rhetoric to get elected. Nobody should take this kind of claim seriously. If any of the Republicans are going to point to their god Ronald Regan as having created jobs. Please! Ronald Regan is the man who along with Maggie Thatcher sold all your jobs to China. Sure it made his economic numbers look good, but we are all paying the price of that genius thinking.
Second fallacy. The Fed chairman has a magic silver bullet to kill the ghost of Recessions. Alan Greenspan was a fake shaman who played to the CNBC galleries. The truth is that the Fed chairman can only do so much with monetary policy. The Fed cannot make the Banks lend. Only the Banks can create money and only the Banks can make other banks lend.
So what is the answer great one ? Will we never see the end of this economic funk and see happier times ? Of course we will. There is a natural order of things. As prices fall, they will hit a bottom. People will wake up one morning and say, the heck with it, let me go out and borrow and start buying things again. They just need confidence that the world is not ending today. Soon the banks will run out of accruals on their old loans and need to lend again. Some upstart bank will figure out they need to get on top of the rankings by lending more aggressively. And everything will work again – magic!
So Mr. Bernanke my advice to you is don’t just do something. Stand there and let things take their natural course. And Mr. Obama I know things may not come up to speed by re-election time. But there is squat you can do about it. Easier to take a step back and talk sense to the sensible part of the population. Get the fear index down. And don’t make silly promises that you will not be able to keep. You should be just fine.
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