Economy
HSBC: Asia’s Giant Asset Bubble Unsustainable
From a report in The Asset Magazine:
“It is time. According to HSBC, one of the biggest banks in the region, it is time for sharper rises in interest rates and more restrictive monetary policies to counter the disturbing trend of asset prices in the region that are rising to unsustainable “bubble” levels.
In a report entitled “Tayloring Asia” released to the media on April 8, the bank’s economists argue that the time might have finally arrived for monetary authorities across the region to finally start adopting more restrictive monetary policies to quell the potential of a massive asset bubble surfacing in Asia.
The economists say the spectre of a massive asset bubble underway in Asia could threaten the region’s prospects, bringing it to the edge of an economic precipice similar to what the US experienced in recent years.
They argue that the time has come to finally adopt more prudent policies after the massive stimulus spending pursued by governments last year and the willing cooperation of central banks to ease monetary policies to allow many economies to shield themselves from the impact of the global financial crisis.
“You’ve probably read it in these pages first. And you’ll read it here several times more: unless something more drastic is done, Asia is headed straight into an asset bubble,” warns the report by economists Frederic Neumann and Song Yi Kim.” (emphasis mine)
To read the full report go here.
One Effect of U.S. Trade with China: 2.4 Million Jobs Lost
The U.S. unemployment rate held steady at 9.7% in March. The number of unemployed persons remained little unchanged at 15.0 million.
Last month employers added 162,000 jobs but 48,000 of them were temporary workers hired for the 2010 census. In the manufacturing sector, 2.1 million jobs have been lost since December 2007. 17,000 jobs were created in this sector in March. Many of the manufacturing jobs lost over the past couple of decades may never return to the U.S. The free trade agreements signed by the U.S. over the years such as NAFTA and WTO policies have not only eliminated millions of jobs in the U.S. but also have helped drive down the wages for workers. In order to understand the loss of manufacturing jobs, we have to look at the impact of U.S. trade with China since China is the largest exporter of goods to this country.
A recent report titled “Unfair China Trade Costs Local Jobs” by By Robert E. Scott for the Alliance for American Manufacturing analyzes the impact on U.S. jobs due to rising trade with China. The following are some of the key takeaways from this paper:
- Since the entry of China into the WTO in 2001, 2.4 million jobs have been lost in the U.S. between 2001 and 2008
- The dramatic rise in trade with China has a created a growing trade deficit and is the primary reason for the loss of manufacturing capacity and jobs in the U.S.
- 100 million workers have been affected by falling wages due to competition from low-wage countries like China and others
- China accounted for over 40% of all non-oil imports into the U.S.
- The hardest hit areas include the Silicon Valley in California proving that not only low-tech manufacturing jobs moved to China but also high-tech manufacturing jobs
- One of the major reasons for U.S. trade deficit with China is China’s manipulation of its Yuan by pegging it to the dollar at a rate that undervalues the Yuan
- The Chinese government policy encourages export while maintaining stiff trade barriers on imports and entry restrictions on many domestic industries such as banking, insurance, etc.
After China’s entry into the WTO in 2001, President Bill Clinton claimed that the agreement “creates a win-win result for both countries” (Clinton 2000, 9). He argued that exports to China “now support hundreds of thousands of American jobs” and that “these figures can grow substantially with the new access to the Chinese market the WTO agreement creates” (Clinton 2000, 10)”. However nine years later we now know that this was not the case. U.S. exports to China is lesser than imports from China. Hence the number of jobs created in the U.S. due to exports to China is always lower than the number of jobs lost or displaced due to imports from China. For example, “U.S. exports to China in 2001 supported 166,200 jobs, but U.S. imports displaced production that would have supported 1,188,200 jobs.” Thus overall from a jobs growth perspective, China benefited greatly from growing trade with U.S.
Who Benefits the Most from Tax Cuts?
Last September Forbes magazine published The Richest People in America. From the report:
“America’s super rich are getting poorer. For only the fifth time since 1982, the collective net worth of The Forbes 400, our annual tally of the nation’s richest people, has declined, falling $300 billion in the past 12 months from $1.57 trillion to $1.27 trillion.”
In a related note titled “Capitalism: A True Love Story” Steve Forbes wrote:
“–A pro-growth tax system. Taxes are a price and a burden. Low tax rates on income, profits and capital gains foster more risk- taking and higher growth, bringing about a richer economy with a higher standard of living–along with higher government revenues.”
One of the reasons, the wealthy stay wealthy and continue to multiply their wealth despite the boom and bust cycles in the economy is due to tax cuts.
During the Bush Administration, the wealthy enjoyed significant tax cuts. The 2001 tax package cost the federal government $1.3Trillion in lost revenues according to Congress’ Joint Committee on Taxation. The tax cuts had an uneven effect on different groups of taxpayers. The wealthy benefited greatly as a result of the cuts while others did not.
The following chart shows difference in income growth between the rich 400 American households and the rest between 1992 and 2007.
Source: Economic Policy Institute
The figures noted in the graph are inflation-adjusted. The pre-tax income of the 400 households grew by 409%. The equivalent after-tax income growth during the same period totaled a whopping 476%. This is because tax rates applied to their income had fallen by a third.When capital gains and dividend income taxes were reduced dramatically during the previous administration it helped the wealthy preserve and grow their wealth even more.
During the same 15-year period, the pre-tax median household income of the majority of Americans grew by just 13.2%. Despite the dot com boom, the financial crisis, housing bubble and other events the wealthy thrived while the rest of Americans lost out again.
Who are America’s Most Privileged Workers ?
An article in the Wall Street Journal on Friday lays out one reason why many U.S. states are facing deep budget deficit issues. From the article:
“What if government workers earned the average of what private workers earn? States and localities would save $339 billion a year from their more than $2.1 trillion budgets. These savings are larger than the combined estimated deficits for 2010 and 2011 of every state in America.”
In fact America’s most privileged class are the unionized workers. Private sector workers on the other hand do not get paid great salaries and benefits like the public sector workers. Over the years as private sectors workers faced rising layoffs, wage and benefit cuts, competition from overseas workers brought into the US, off-shoring of jobs, etc. public sector workers have enjoyed job security with rising compensation.
The chart below shows the difference these two class of workers in America today:
Some of the interesting points noted in the article include:
- From 1998 to 2008 public sector employee compensation grew by 28.6% compared to 19.3% for private workers
- Last year despite the great recession and budget deficits more than half the states gave pay raises to their workers
- In 2008, for every $1 received in pay and benefits by a private sector employee, a government worker earned $1.45
- The pay gap between private and public workers is the widest in states with the highest deficits which include New Jersey, Nevada and Hawaii
- In California, 3000 retired teachers and school administrators who retired at the early age of 55, receive $100,000 a year in pension payments
- States such as California, Nevada and Ohio allow workers to retire in their 50s and then get re-hired for the same job and get paid twice - once in the form of retirement checks and the other as the salary for the job. This scam in Ohio allows some teachers in Ohio to earn as high as $200,000 each year
Considering the facts above, it would not be an exaggeration to call some of these states as “failed states” for the inability to reign in on lavish payouts to employees and reckless spending of tax payer money. In addition one can come to the conclusion that in today’s capitalist USA, unless one can get an executive-level job in the private sector with nice golden parachutes it is wise to take a government job whether it is at the state, local or at the federal level. It is a bit ironic that in a country that believes in the virtues of free market capitalism and the private enterprise, the best paying jobs are actually in the government sector.
Global Housing Prices May Fall Further
An article in the latest edition of IMF’s Finance & Development magazine offers a historical perspective on housing prices and explores the causes of boom-and-bust cycles in the housing market.
From the article titled Housing Prices: More Room to Fall?:
“IN 1625, Pieter Fransz built a house in Amsterdam’s new Herengracht neighborhood.
As the Dutch Republic rose to global power in the 1620s—with Amsterdam developing the world’s first major stock market as well as commodities and futures markets—the price of the house doubled in less than a decade. Over the succeeding three centuries, the price of Fransz’s house was knocked down by wars, recessions, and financial crises and rose again in their aftermaths (Shorto, 2006). When the house changed hands in the 1980s, its real value, that is after inflation, had only doubled over the course of 350 years––offering a very modest rate of return on the investment.Indeed, viewed over the long course of history, the distinctive feature of house prices in Herengracht has been not the trend but the cycles (see Chart 1): innovations and good times raised the price for years at a time and—seemingly just when the conviction had taken root that this time would be different—shocks came along to knock prices back down.Starting in the late 1990s, prices of houses in Herengracht, and more generally in Amsterdam, doubled in value in 10 years, only to begin another sharp decline. This recent run-up and correction in prices in Amsterdam was part of a global boom and bust in house prices. House prices soared in the United States, fueled by innovations in housing finance. They also rose in Ireland, coinciding with a historic growth surge; in Spain and Australia, buoyed by immigration; and in Iceland as part of a boom induced by a tremendous expansion in the country’s financial sector. In 2006, house prices started to fall, first in the United States nd then elsewhere (see Chart 2).”
Can house prices fall further?
According to the author Prakash Loungani, house prices in many countries have more room to fall.
The author offers the following three points to support his conclusion:
- Housing prices in many countries still remain above the early 2000 levels
- House prices remain above rents and income
- The recent corrections in many markets have still not erased the excessive run up in prices during 2000-06
Can the Chinese Renminbi Replace the US Dollar as the World’s Reserve Currency?
China was the world’s largest economy before 1890. According to Professor Angus Maddison, author of the Chinese Economic Performance in the Long Run, China’s role in the world has changed dramatically in the last thousand years and China is likely to become the world’s largest economy by 2015 beating the US. The author mentioned that China’s economic growth in the next 30 years will not be diminished due to the recent global credit crisis.
The graph below shows the possible futures for the economies of China and the US:
Source: Towards a new reserve currency system?, OECD Observer
Chart showing the projected growth of GDP in Developed and Emerging Markets thru 1950:
After the World War II, the US dollar dethroned the British sterling to become the world’s reserve currency. The dollar accounts for about two-thirds of the global reserves and 88% of daily foreign exchange trades.
From the OECD Observer article noted above:
“The additional demand for dollars has generated “seigniorage” revenues: in 2008 the US Fed made a net interest income of $43 billion from issuing the currency, which as The Economist newspaper once put it, effectively makes US dollars in global circulation an interest-free loan by the public to the nation’s central bank.”
Empires based on currency rise and fall according to Professor Avinash Persaud. In his 2004 speech titled “When Currency Empires Fall” he noted the following:
“There are good reasons why there is seldom more than one dominant currency. Reserve currencies have the attributes of a natural monopoly or in more modern parlance, a network. If it costs extra to trade with some one who uses a different currency than you, it makes sense for you to use the currency that most other people use, this makes that currency yet bigger and cheaper to use. There is a good analogy with a computer operating system. In that world, Windows is the dollar.
This networking power is why Central banks store dollars in their reserves in a far greater proportion than the proportion of trade with the US. While 30% of international trade is with the US, 70% of central bank reserves are in dollars. It is why most commodities, like oil, copper and coffee are priced in dollars, wherever they are found and whoever they are sold to.
Something else we can be more certain of is that reserve currencies come and go. They don’t last forever. International currencies in the past have included the Chinese Liang and Greek drachma, coined in the fifth century B.C., the silver punch-marked coins of fourth century India, the Roman denari, the Byzantine solidus and Islamic dinar of the middle-ages, the Venetian ducato of the Renaissance, the seventeenth century Dutch guilder and of course, sterling and now the dollar.
A necessary condition of a currency becoming a reserve currency appears to be its breadth of use and cost and ease of transaction, not, as some might think, the ability to hold its value. Clearly hyperinflation would not serve a reserve currency, and the end of reserve currency status is often associated with a cycle of inflation. But within the normal bands of inflation, it is size as a trader that matters. In the long-term, the Swiss franc and yen have been better stores of value than the dollar. Since 1980, they have appreciated by more than 21% and 54% versus the dollar respectively. Yet for much of this time, combined, they have represented no more than 10% of central bank reserves.
In the 18th century Britain was the largest economy of the western world, London was the centre of international trade and finance, the currency was convertible and so sterling became the world’s reserve currency. By the late 19th century, the US had become the world’s largest economy, a position solidified by Europe’s repeated attempt at self-annihilation from the 1880s to the 1940s. By the 1960s, the dollar had usurped sterling and was the world’s new reserve currency with 60% of total central bank reserves being held in dollars, twice the level of sterling reserves.
But time doesn’t stop. By the mid-21st century, the US will no longer be the world’s largest economy. By then, China and India will have overtaken the US, western Europe and Japan, on purchasing power parity terms at least, which should represent where exchange rates are likely to be in the long-run. Indeed optimistic measures of sustainable growth in China and India suggest this will be the case in twenty years time. Ladies and gentlemen, within my life time, the dollar will start to lose its reserve currency status, not to the euro, but to the renminbi.”
According to the latest Treasury data, the Chinese hold $ 894.8 billion of US Treasury securities as of December 2009. China is the largest creditor nation in the world while the US is the largest debtor nation. The Chinese renminbi may become the global reserve currency by 2050 since its economy in terms of purchasing power parity is projected to outstrip the US economy. However China has to make its currency fully convertible, remove restrictions on foreign capital entering and leaving the country, accelerate financial reforms before the renminbi can become the world’s currency of choice.
