tag:blogger.com,1999:blog-7820485130017459619.post6765722738488303164..comments2023-10-24T01:46:47.151-07:00Comments on CynicusEconomicus: UK Bank Bailout - Round 2 Begins?Unknownnoreply@blogger.comBlogger9125tag:blogger.com,1999:blog-7820485130017459619.post-1402528082428755772009-01-06T05:02:00.000-08:002009-01-06T05:02:00.000-08:00Okay, let me be the first to admit that although I...Okay, let me be the first to admit that although I know almost every economist on Earth thinks protectionism is a mortal sin (and I respect their greater knowledge), I find it kind-of attractive.<BR/><BR/>The argument seems to be that the costs of implementing protectionism greatly outweigh the potential gains from it. I understand that and have always supported free trade... but lets just consider the alternative.<BR/><BR/>It seems to me that some nations are more 'abundant' than others. Natural resources, energy, good environment for agriculture, non-destructive political environments, non-destructive weather patterns and the like. So some places are 'lands of plenty' while others struggle to survive.<BR/><BR/>Putting aside (for the sake of argument) the need to 'feed the world', I wonder whether Protectionism could work, where a nation is able to provide everything it needs to maintain a good standard of living?<BR/><BR/>Yes, goods would cost lots more. Yes, our own exports would be 'hit' because other countries would reciprocate (but we export much less than we import). I know the cost of enforcing the trade barriers would be expensive. Yes, we wouldn't be able to so-easily get the cheap foreign luxuries we now enjoy. But would we not simultaneously ensure reasonable jobs and opportunities at home?<BR/><BR/>It's easy to count the pennies and say that what we gain from being able to outsource manufacture of cheap goods from other nations is valuable. I'm sure the cost of Protectionism is very, very high in monetary terms. But did anybody ever consider other factors, which are not monetary?<BR/><BR/>There are psychological and sociological implications to losing jobs and skills overseas. They don't have an obvious 'cash' value, but society is damaged as unemployment increases and as people see their ability to contribute to society eroded. The cost of that damage is hard to quantify, but is likely to be extremely substantial. Creativity and Confidence is assisted by opportunity, not the lack of it.<BR/><BR/>I know I've just chucked petrol on the fire, and much of this comment is Devil's Advocate, but I'd really like to hear Cynicus (and other intelligent posters here) take on this.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-1041276265308091782009-01-06T01:21:00.000-08:002009-01-06T01:21:00.000-08:00Protectionism stirs in the USThe US has a very lar...<B>Protectionism stirs in the US</B><BR/><BR/>The US has a very large economy, and, if it ever went fascist or adopted a left-version of protectionism, it might rebuild its industries through a large-scale state-directed industrial policy.<BR/><BR/>The neoliberal wing of the Republican party has been rejected in its McCain and Bush incarnations. What is left for the GOP? It has always had a "paleo-conservative" wing, whose effective leader over the 16 years has been Patrick Buchanan. This wing preaches protectionism and looks to its 18th century hero, Alexander Hamilton, the inventor of American statism and protectionism. <BR/><BR/>If an Obama administration causes a new Great Depression, one can easily see a paleo-conservative Republican victory in the next presidential election and a return to US protectionism.<BR/><BR/>One only needs to see what Buchanan, the spokesperson for this faction of GOP, is saying:<BR/><BR/>Patrick J. Buchanan, China’s Path to Power, November 11, 2008<BR/>http://buchanan.org/blog/2008/11/pjb-chinas-path-to-power/Lord Keyneshttps://www.blogger.com/profile/06556863604205200159noreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-33350150837831995642009-01-04T22:08:00.000-08:002009-01-04T22:08:00.000-08:00Hi, i made a comment about the bail out going towa...Hi, i made a comment about the bail out going towards science or humanitarian projects but this applies to infrastructure projects or big spending initiatives, the point I was trying to make was that credit isn't a bad thing in this case consumer credit has turned out to be very bad but i think the original idea and one of the main reasons for banks in the first place were to lend so people have the extra resources available to increase productivity, as long as the lending is going towards productive branches of the economy it should be encouraged, the bail outs that we've seen recently are towards failing or failed branches of the economy in which case they are indeed bad.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-85986964892145795662009-01-04T21:24:00.000-08:002009-01-04T21:24:00.000-08:00On currency devaluation as a trade policyLet me wr...<B>On currency devaluation as a trade policy</B><BR/><BR/>Let me write an addendum to my previous post on Chinese currency devaluation as an industrial policy.<BR/>Lest people think that this policy is confined to East Asian countries and not to the West, the US has actually practised it as well!<BR/><BR/>The Plaza Accord (1985) was an attempt by the Reagan administration to boost its exports after the recession of 1980-1982.<BR/><BR/>A brief summary on Wikipedia:<BR/><BR/><I>“The Plaza Accord … was an agreement signed on September 22, 1985 at the Plaza Hotel … by … France, West Germany, Japan, the United States and the United Kingdom. The five agreed to, amongst others, depreciate the US dollar in relation to the Japanese yen and German Deutsche Mark by intervening in currency markets.<BR/>The exchange rate value of the dollar versus the yen declined 51% over the two years after this agreement took place ….<BR/>The reason for the dollar's devaluation was twofold: to reduce the US current account deficit, which had reached 3.5% of the GDP, and to help the US economy to emerge from a serious recession that began in the early 1980s. The U.S. Federal Reserve System under Paul Volcker had overvalued the dollar enough to make industry in the US (particularly the automobile industry) less competitive in the global market. Devaluing the dollar made US exports cheaper to its trading partners, which in turn meant that other countries bought more American-made goods and services. The Plaza Accord was successful in reducing the US trade deficit with Western European nations but largely failed to fulfill its primary objective of alleviating the trade deficit with Japan because this deficit was due to structural rather than monetary conditions. US manufactured goods became more competitive in the exports market but were still largely unable to succeed in the Japanese domestic market due to Japan's structural restrictions on imports …. The Louvre Accord was signed in 1987 to halt the continuing decline of the US Dollar.”</I><BR/>http://en.wikipedia.org/wiki/Plaza_Accord<BR/><BR/><BR/>So there we have it: the supposedly free trade Reagan administration, with its passionate belief in “free markets,” pioneered the approach that China later took. The only difference was that the Plaza Accord was not very successful with respect to Japan, simply because Japan protects its domestic markets from foreign imports in a way that overcame the effects of the currency devaluation.Lord Keyneshttps://www.blogger.com/profile/06556863604205200159noreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-72466150594763598572009-01-04T13:17:00.000-08:002009-01-04T13:17:00.000-08:00This doesn't really follow on from your present po...This doesn't really follow on from your present post, but here goes.<BR/><BR/>Many companies operating in the UK are based in Eurozone countries. If the Euro holds firm and the pound goes belly up, will they start conducting all their UK business in Euros? If they do, will the Euro become the preferred currency for other businesses operating here too? <BR/><BR/>If so, then John Major's old idea of a common rather than a single currency competing with domestic currencies in each member state will come true here at least - though scarcely in a way he would have expected all those years ago. And presumably inflation will then hit the public sector workforce paid in sterling worse than the private sector paid in Euros.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-45375680859749583102009-01-04T09:07:00.000-08:002009-01-04T09:07:00.000-08:00Cynicus,Thank you for your reply, your thoughts pr...Cynicus,<BR/><BR/>Thank you for your reply, your thoughts pretty much confirm my own views on China. I agree that China has evolved from an imperialist culture, much like our own in the West. Your view that they are lacking sufficient material assets within their mainland economy rightly supports the argument that we may expect expansionist policies in the future. When we returned Hong Kong in the late 90’s, it was clear they had a plan as they agreed all too easily not to interfere too much with its governing. Today, as they eye up Taiwan, one can only guess where it will lead. My guess is that China would like to mimic the growth of the USA in the last century and become a dominating force in Asia. How Japan, India and Australia might live with that remains to be seen. And I imagine Russia will have something to say about it.<BR/><BR/>However, I differ with you on any optimism for a resurgence of the West as productive force, particularly the UK. It has always been easier to destroy, then to create. It took decades for us to build our manufacturing and production industries. Destroying them took the Tories a couple of terms in power. Re-training skilled labour into virtual pen-pushing became the educational focus. The emergence of the financial sector has been focussed mostly on the London & South East economy, whereas the rest of the UK has been largely disregarded as an asset. What little major manufacturing exists in these regions is increasingly foreign owned creating an outflow of wealth to offset any gains. This especially contains any areas where British industry has had a key competitive and innovative technological edge, which have been systematically sold-off to boost GDP in various years.<BR/><BR/>In contrast, what has driven the success in Asia has been a cultural work ethic from the grass roots coupled with nationalist government uncompromised by democratic principles, which are, by their nature, unfocussed and in constant flux over the decades. In periods, this has worked against them, but since Nixon’s visit, that’s been changing. Today we see a very different attitude, but with the same determined focus. And motivationally, China is driven by strong hunger: they have been the “third world” and now want the same things we take for granted. Our debt culture has spoiled us into thinking we all have the right to a certain living standard, rather than Asians who believe they must earn it.<BR/><BR/>The UK could not suddenly metamorphose back to lower living standards and emphasis on manufacturing and technology. It would require complete reversal in the culture of a generation or two, and immediate and aggressive internal investment, which is not offered by the electable parties in our parliament. It would require a frank admission that mistakes have been made by the present as well as previous administrations. It would require the voices of the wealth producers becoming more important than the wealth accumulators, or a much smaller world where we were forced to depend on ourselves: During the Industrial Revolution period, European countries were much more independent and often politically opposed to neighbours, driving them to a compete individually. Major EU economies still retain some structure of independent wealth, but the UK has followed the US model of asset stripping for “growth”.<BR/><BR/>It would require a revolution in political terms as well as economic progression from easy money, to the hard earned. As has been discussed in previous posts, the democratic need for our politicians to please voters in the short-term is prohibiting a sensible plan to survive the recession for the long-term already: Capitalism and free markets require the natural deflation of the economy and find its own confidence floor based upon the fundamentals and intrinsic value. However, our political leaders favour large-scale government intervention to maintain the illusion and support the bubble. Brown & Co do know clearly that without London acting as the worlds cash conduit, taking its cut for playing the “middle-man”, we have a marginal GDP coupled to net worth compromised by a massive, untenable debt burden.<BR/><BR/>To recast the country into a producer economy would take decades, and even then, there is no guarantee we’d have the same advantages in the future as we did in the past – i.e. before competition was limited to a few developed nations, now the so-called “third-world” has caught up and in some cases exceeded us. That’s not even counting competition from the EU which exceeds us in pretty much everything but debt. Why can Germany and France build world-class quality cars for a profit but the USA and Britain cannot?<BR/><BR/>Western voters will not voluntarily choose a lesser standard of living, whether it is real wealth (earned) or virtual wealth (debt) is of little concern when an individual’s personal “growth” is at stake. Since modern leveraged-living means there are more people in debt than people who are solvent, voters will much rather the government pursued policies of “de-bubble and re-bubble” over “boom and bust”.<BR/><BR/>By comparison, I wonder how much the displeasure of the Chinese people on crisis measures would influences their political class. You have mentioned the possibility of unrest in China if their economy was to suffer any serious fall out, but I’m wondering how their politicians would explain the problems to the people. Would they spin it, and use debt to create the pretence that all is fine and “growth” is a human right? Or would they advise the people that difficult times are ahead, and a unified effort and sacrificial endurance is required?<BR/><BR/>China has strong history of putting aside internal differences and uniting in the face of foreign threats, whereas politics in the West is governed by appealing to the emotions and vanity of the popular classes. Politicians here have to win the “hearts and minds” of the people to win elections. For any UK government, honesty is a risky policy, especially in issues concerning the downgrading of peoples personal wealth, threatening their individualism, and providing no short term easy results. If it is fair to say that capitalism respond to paying the least to make the most; then democracy should respond to policies that cost the least and promise the most.<BR/><BR/>What I find strange is, how did France and Germany manage to hold onto much of their export industries yet our democracy unable to prevent the hollowing out of our industrial heritage? I am sceptical when people say our governments walked into this blindly. It would be a damning indictment of our people if we cannot put intelligent people in power at the helm of our nation.<BR/><BR/>But then I also find it strange that it was the US and UK that together defied international opinion and launched the invasion of Iraq. It was the US and UK that allowed national level property bubbles to get out of control to simulate growth. And it is the US and UK companies that have precedence in the contracts to extract the oil...<BR/><BR/>Wars tend to be very expensive investments, and usually are only undertaken in defence, or to acquire a greater return. Historically they are often also proceeded by periods of high inflation, which both the US and UK have tried to distort with questionable statistics from altered measurement criteria.<BR/><BR/>Is it possible that preferential share of future Iraqi oil revenue maybe the intended collateral for the latest round of government borrowing?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-41938249987319700322009-01-04T03:38:00.000-08:002009-01-04T03:38:00.000-08:00Cynicus,I feel this thought provoking film is extr...Cynicus,<BR/><BR/>I feel this thought provoking film is extremely pertinent to your blog and would be of interest to many of your readers who are - like me - left wondering about the future.<BR/><BR/>http://thezeitgeistmovement.com/addendum.htm<BR/><BR/>Whilst the original Zeitgeist movie is interesting it leaves you feeling somewhat depressed.<BR/><BR/>However the Addendum proposes an alternative system to what we currently have and has been updated to include current events.<BR/><BR/>Enjoy.Jonnyhttps://www.blogger.com/profile/16119442844302447926noreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-11965237546409042582009-01-04T02:55:00.000-08:002009-01-04T02:55:00.000-08:00Mark, many thanks for having the patience to tackl...Mark, many thanks for having the patience to tackle my meandering questions.<BR/><BR/>Just a thought on China: a few months ago I suggested that the West would have been better off had it not tried to compete with China, but had, effectively, refused to trade with them - protectionism. I seem to recall that you replied that protectionism was never a good idea, and that it would have been unfair to deny the Chinese people access to the benefits of capitalism that we enjoy. But as you have suggested, and as Lord Keynes points out so well above, the Chinese were practising their own form of protectionism anyway and we appear to have fallen into a clearly-marked trap. As you have also discussed previously it is possible that Chinese policies will have unforeseen global consequences that leave China in a worse position than it would otherwise have been. <BR/><BR/>Yet to the outside world, if we didn't know about the Chinese government interventions, China would just look like a country with people who have a culture of working extremely hard for very competitive wages and who save a lot of their earnings. It appears that trading with such a country is enough to bring down the entire global capitalist economy. It does make the system seem a bit... fragile, doesn't it?<BR/><BR/>I obviously understand that simplistic government policies distort what would have been the independent(-ish) actions of millions (billions?) of individual participants in the economy, but then again, what about the distorting effects of huge companies such as Microsoft?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-68051199210497072252009-01-04T01:17:00.000-08:002009-01-04T01:17:00.000-08:00A fascinating post that raises many issues.I would...A fascinating post that raises many issues.<BR/><BR/>I would like to comment on your discussion of Chinese protectionism through currency manipulation.<BR/><BR/>You state:<BR/><BR/><I>“One of the subsidies that I highlight is the subsidy implicit in their currency manipulation. In this case, the subsidy is collectivised over the whole economy. In keeping their currency low, they are effectively removing purchasing power from every individual in the country, and every business. It is actually an indirect taxation. This is quite difficult to explain in short but I will try. When a consumer walks into a shop in China to buy a pen, the artificial exchange rate will make the pen made in the US x% more expensive. The indirect taxation on purchasing is the difference between the price of the US made pen in the situation of a free floating currency and the actual price today with the fixed exchange rate (y). The person is 'y' poorer as a result of paying that indirect tax.</I><BR/><BR/>When China devalued the RMB in 1994 by 45%, this functioned as an export subsidy to US and EU markets, but surely also as a domestic tariff on foreign manufactured goods imported into China. <BR/>Your analysis about the pen is very interesting: when someone buys a pen in China the cost is as follows:<BR/><BR/> x (the cost of the pen made in the US in a floating currency) + y (the additional cost because of the undervalued RMB = z (the cost that is sum of these two factors).<BR/><BR/>But it is very obvious the factor y really just functions as a de facto tariff on foreign goods imported into the Chinese market for domestic consumers spending RMB they have earned.<BR/><BR/><B>So in actual fact the devalued RMB is a double form of protectionism: a de facto export subsidy for exported goods from China to the West, and a de facto tariff on foreign imports coming into China.</B> This is the classic form of the infant-industry protectionism, or import-substitution industrialization (ISI), as it is now known in its modern theoretical form.<BR/><BR/>The real question is this: for many goods this policy is actually a fundamental drive to create new industries in China that produce for the domestic market: for instance, why buy an imported pen from the US or the EU anyway, if China can produce it in domestic industries using domestic parts and labor (perhaps some imported raw materials are necessary and initial purchases of machine tools to create the factories). If this creates more industries in China, it will good for the Chinese economy in the long run, as it can make pens internally, and eventually export them to foreign markets at a cheaper price.<BR/>Chinese consumers may be suffering “indirect taxation” in the short term, but in the long term there are more jobs for Chinese people to make pens and thus earn income to consume on other things. The “indirect taxation” ends when domestic pen manufacturers market their cheaper product to domestic Chinese consumers (who will presumably prefer to buy it over imported ones) and then start earning foreign dollars from pen exports overseas. In the long run, the overall economy wins. <BR/><BR/>Secondly, you state:<BR/><BR/>“If we look at China, it was a 'fettered' market before 'opening'. Millions of 'losers' were already 'overboard', and have been rescued by markets.”<BR/><BR/>What has China been rescued by? It is certainly not pure classical liberalism or true free trade or the orthodox form of neoliberalism or consistent, pure “free market” economics. We have spent a good part of this blog demonstrating that China follows a radical state interventionist and protectionism/mercantilism system. It has followed a variant of the import-substitution industrialization (ISI) that created the economic giants of Japan, South Korea, and Taiwan. Access to the US market, a fundamental element of these countries export-led economic growth, is also a feature of China’s.<BR/>The classic policies of ISI were:<BR/><BR/>(1) an active industrial policy to subsidize and orchestrate production of strategic substitutes<BR/>(2) protective barriers to trade (e.g. tariffs)<BR/>(3) an overvalued currency to help manufacturers import capital goods (heavy machinery), at least initially in industrial development.<BR/><BR/>In South Korea, Taiwan and Japan, there also these additional elements of ISI: <BR/><BR/>(4) Export led growth = outward-oriented ISI<BR/>(5) direction of subsidies and investment on industries which would make goods for export<BR/>(6) no significant attempt to undervalue the local currency.<BR/><BR/>China certainly practises (1), (4), and (5). (2) is achieved by the undervalued currency. China is an exception to (3) and (6). Other East Asian states did not rely so much on an undervalued currency, but had the government invest directly in creating industries for export.<BR/><BR/>Markets can operate in Keynesian states or protectionist states, but they were hardly the only or most important cause of China’s spectacular economic rise. For that, you must look to the state and protectionism. If the free market had truly been allowed to function in China (i.e., the abolition of protectionist policies, a free floating currency etc), it would simply not be the economic giant it is today.Lord Keyneshttps://www.blogger.com/profile/06556863604205200159noreply@blogger.com