Relevant and even prescient commentary on news, politics and the economy.

Another Cost of Low Prices

In the matter of externalities, accusing political enemies of being terrorists even after they are cleared of all wrongdoing is a feature of having economic power.*

Good thing it’s not being done by a country G-Mu dislikes, or we’d hear about this at Marginal Revolution. But they’re too busy arguing that the Greenspan Commission were liars with malice aforethought.

*Not that the United States would ever do that.

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Silliness from Time Magazine

Via Brad DeLong, I see Time magazine has identified the “25 people to ‘blame’ for the financial crisis.” [my sarcastic quotes on blame; Time appears to be serious]

Amazingly, none of TWX’s (mostly former) top management—who pushed LBOs in the 1980s and Internet bubbles in the 1990s—makes on the list.

More amazingly, Lew Ranieri is on the list, while David Malpass is not.

Also making the list: Wen Jiabao, because the Chinese government “supplied the U.S. with an unprecedented amount of credit over the past eight years.” Let’s leave aside whether that credit wasn’t primarily to support Chinese exports (see, e.g., Brad Setser) and ask the obvious question:

Given that an external economy is providing you with (realtively) “easy” credit, what does that imply your Monetary Policy should be?

UPDATE: DeLong takes M2 to the next step, with predictable results.

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In Which I Say Something Nice about Globalization

It’s still not “free trade” in a sense anyone but the self-delusional Greg Mankiw could describe it, but there are some gains accruing to China.

As the Chinese economy moves from agriculture to producing more goods and services, two things have happened. Energy demand has gone up:

And people have been able to afford services they could not before:

It’s not much, but it’s a start, and we would be disingenuous to deny that.

(All data from the World Bank)

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U.S. Energy Policy Could Be Worse (No, Really!)

by Tom Bozzo

It could be China’s, for one. The FT reminds us that there are income and substitution effects:

Even though GM does not officially sell Hummers in China, a booming grey market has developed. In Beijing alone, more than 15 car dealers are selling the tank-like vehicles to China’s army of new car-buyers.

Hummers have become particularly popular among the wealthy urbanites who like to spend their holidays on long driving treks across the country.

The trend is abetted by the government, since like a moderately terrifying portion of the developing world, China subsidizes motor fuel at retail:

With demand for oil growing at 8 per cent a year, mostly met by imports, the country is the biggest contributor to the annual increase in oil consumption. Yet its petrol and diesel prices are as much as 40 per cent below US levels – themselves low by European standards.

Since China still has legions of the dirt-poor, and only the relatively well-to-do can afford cars (even if many of the new auto market participants aren’t rich by Western standards), this is a major case of upward redistribution.

Meanwhile, for a cross-cultural brand presence (or is that penetration?) laugh:

Beijing Auto has a military-style SUV called the Trojan.

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Enlightenment: You and Me and China make Three

I have been reading the book: The Writing on the Wall. Mr. Will Hutton is the author.

The book is billed as a look at what makes China tick and what the west should do about it. I chose it on the strength of the reviews as I wanted to learn more about China in regard to our discussions concerning globalization. I also wanted to hear a voice not from the US. Mr. Hutton is very established in the economic world in England. Maybe he is their Mr. Krugman?

You can read a summary regarding the subject of China by Mr. Hutton here.

In the book, he looks at the history of China and makes note of the similarity throughout time of the Chinese thinking of life. He seems to have asked: What is their heritage and how does it inform us as to their future? The conclusion: China needs to move through the period of enlightenment just as the west has. China needs to allow the development of the culture that the Enlightenment Period birthed giving rise to people such as Tom Paine, our founders and Adam Smith if they want to succeed in applying a western capitalistic system. This is the hitch in China’s current functioning. Their communist ideology of one party rule can not hold if they are to sustain their historic annual growth. And they must sustain the growth because they are such a large population.

From the above article by Mr. Hutton:

…but there are limits to how far the reformers can go without giving up the basis for the party’s political control. Conservatives insist that much further and the capacity to control the country will become irretrievably damaged; that the limit, for example, is being reached in giving both trade unions more autonomy and shareholders more rights. It is the most urgent political debate in China…
The maxims of Marxist-Leninst-Maoist thought have to stand, however much the party tries to stretch the boundaries, because they are the basis for one-party rule…
Enterprises are accountable to no one but the Communist party for their actions; there is no network of civil society, plural public institutions and independent media to create pressure for enterprises to become more environmentally efficient. Watchdogs, whistleblowers, independent judges and accountable government are not just good in themselves as custodians of justice; they also keep capitalism honest and efficient and would curb environmental costs that reach an amazing 12 per cent of GDP. As importantly, they are part of the institutional network that constitutes an independent public realm that includes free intellectual inquiry, free trade unions and independent audit. It is this ‘enlightenment infrastructure’ that I regard in both the West and East as the essential underpinning of a healthy society. The individual detained for years without a fair trial is part of the same malign system that prevents a company from expecting to be able to correct a commercial wrong in a court, or have a judgment in its favour implemented, if it were against the party interest.

Over stir-fried curried chicken and crispy fried flying sea bass, the Chinese guests repeated politely and persuasively that China was making up new economic and political rules.

Does that last sentence sound familiar?
The aide said that guys like me were ”in what we call the reality-based community,” which he defined as people who ”believe that solutions emerge from your judicious study of discernible reality.” I nodded and murmured something about enlightenment principles and empiricism. He cut me off. ”That’s not the way the world really works anymore,” he continued. ”We’re an empire now, and when we act, we create our own reality. And while you’re studying that reality — judiciously, as you will — we’ll act again, creating other new realities, which you can study too, and that’s how things will sort out. We’re history’s actors . . . and you, all of you, will be left to just study what we do.”

This brings me to why I’m writing about Mr. Hutton’s book. He’s not just writing about China and what the west needs to do, he is writing about us and what we are loosing. By loosing our enlightenment heritage, we will loose our way with China. The most striking thought I had as I read through the chapters on China was that his descriptions were familiar.

Even though the book is in chapters, the layout is in two parts; China and then the US. Though, the US does stand as a sort of proxy for the west in part as Mr. Hutton’s other writings have noted the trends away from enlightenment derived ideology within his country; just not too the extent of the US. I do not recall reading or hearing of anyone of position within the European Commons presenting such a thought as relayed in Ron Suskind’s article quoted above. It is a thought that is not so harmful from the life of delusion it relays as much as it is harmful from the resultant action begot of condescension and dismissal of all other people. I have not heard such personality coming from Europe. Not hearing such, means Europe is more real than US and that means (if Mr. Hutton is correct) that the US of A is no longer the example to be followed by developing nations. It means we are becoming irrelevant in the discussions regarding how to create a better world. The light is on in the Statute of Liberty, but no one is home.

As he describes what China needs to create specifically, I could not help think “but we’re going in just the opposite direction.” There is the distinct possibility that we could meet China half way. This would be a great loss for the world because we would have pulled back from the gains Mr. Hutton attributes to our passage through the enlightenment as much as China would have move toward it. Essentially the movement would result in leaving two mega economic powers in a state of half-fastness. The US having not sustained it’s progress of enlightenment derived social structure, thus a half-fast job of living and China not completing it’s progress through enlightenment derived social structure, thus a half-fast job of living. Where does that leave the rest of the world?

I believe we have seen such a reversal from enlightenment derived social structure in Putin’s Russia. We have in Putin a living example of the danger to a nation that let’s it’s fears pull it away from enlightenment. He has undone much of what Mr. Gorbachev sacrificed for. Mr. Putin has copied the posture of our current president Bush. Most notably was Mr. Putin reserving the right to preemptive strike within I believe 2 weeks of President Bush establishing such a policy. Mr. Putin’s governance is the manifestation of the harm of the implementation of “… and when we act, we create our own reality”. Bush et al acted in all their glory of condescension and begot Putin who happens to be sitting on a lot of raw material the world needs for economic production.

It is Mr. Hutton’s theory, that passing through the Enlightenment Period is the explanation for what we and Europe had accomplished and ably implemented in Japan and post WWII Germany that I want to discuss in the next posting. I believe it will help us understand a lot of what we have discussed here at Angry Bear concerning what has happened in this nation. Why do Cactus’ graph show what they do. Why does PGL say we do not have to fear globalization. Why Mr. Hutton states:

Britain and the West take our enlightenment inheritance too easily for granted, and do not see how central it is to everything we are, whether technological advance, trust or well-being. We neither cherish it sufficiently nor live by its exacting standards. We share too quickly the criticism of non-Western societies that we are hypocrites. What China has taught me, paradoxically, is the value of the West, and how crucial it is that we practise what we preach. If we don’t, the writing is on the wall – for us and China.


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The Latest Skirmish at the WTO

As reported by The Globe and Mail, on behalf of European and U.S. financial services, Europe and the U.S. have registered a complaint with the WTO that China is “breaking international trade law.”

The European Union and the United States filed a complaint with the World Trade Organization (WTO) yesterday, concerned that China is trying to freeze out foreign competitors in an effort to build a state monopoly in the $100-million financial information sector

China’s state-owned company, Xinhua, is at the center of the controversy. Financial services such as Bloomberg LP, Reuters LP, and Thomson Corp are required to go through Xinhua, their major competitor, to reach their customers.

“Our members are complaining that they can’t reach their customers in China because they’re required by regulations to go through Xinhua,” said Ken Wasch, president of the Software and Information Industry Association. The Washington, D.C., group represents the financial information industry, including, Bloomberg, Dow Jones, and a combined Thomson-Reuters, following the Thomson takeover from last year.
“We want to have direct access to our customers, we don’t want to have to go through our competitor in order to reach them,” Mr. Wasch said.

Financial services sell data, in real time, to their customers, such as banks and brokerage firms. Their customers then use the data to make financial decisions.
While money is certainly at stake, I would differ with the thrust of the article that this complaint differs substantively from China’s attempt to control the media.
Despite what China’s defenders say, China is a command economy. Whoever controls the flow of information, controls what happens. If Xinhua stays between foreign financial services and their customers, a number of consequences ensue:

  1. The flow of information slows.
  2. Xinhua becomes a de facto regulator of financial information. As the Herald Tribune points out:

    The new regulations make Xinhua both a competitor and regulator to its foreign rivals, requiring that data, videos and photos be funneled through Xinhua-approved distributors. The only currently approved distributor is a Xinhua subsidiary.

In some ways, this controversy is similar to the one surrounding Sovereign Wealth Funds. Both are extensions of a centralized government. Both create problems concerning transparency. Both can be used to forward a government’s political agenda. In the market place, both can be used to pick winners or losers.

What we are witnessing is a struggle between two radically different modes of governance, two antithetical types of economies. Those who celebrate globalization as the triumph of the free, democratic market place perhaps should look more closely at precisely the nature of what is happening. Sovereign Wealth Funds–both in China and the Middle East–are in ascendance. In both the Middle East and in China, information is tightly controlled in order to advance political or religious agendas.

This latest skirmish, while seemingly just about money, is part of the larger battle that is being waged. Oil and cheap labor have been “lures.” Just as the smart fisherman dangles colorful enticements before his unsuspecting prize so too have China and the Middle East lured us with promises of cheap energy and abundant, cheap labor. Now, weaken by our own economic folly and greed, are we ready for the struggle that is to come?

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Central Heating – Chinese Communist Style

John M. Glionna writes:

Winter weather has already arrived here, with temperatures dropping into the high 30s on some nights. But Li’s home in the 500-unit Flower Garden Apartments in a northern suburb of the capital has provided scant refuge from the growing chill. Instead, Li and an estimated 200 million of China’s poor have been forced to shiver as they mark off the days until Nov. 15 arrives. That’s when municipal managers switch on boilers, radiators and immersion heaters, firing up central heating systems that are a throwback to the Communist-planned economy of the 1960s.

Kevin Drum notes:

Man, when they say central heating in China, they really mean central heating. Crikey.

Even in Los Angeles, you get a variation of this. It’s a bit warm today but my office is just boiling. So I complain about them turning off the air conditioner – and they note this is just how it’s done in this office building after October 31. I’m tempted to wear a tee shirt and shorts to the office tomorrow.

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