Thursday, June 09, 2005

Mercantilism

Forbes has an editorial up. Worth reading.

10 comments:

jimdesu said...

I agree w/ him wrt. our overuse of WTO sanctions (which we often impose on our competitors to stall imports, then six months later when it's time for the hearing, suddenly drop all charges (and do it again later -- really ticking off African farmers, btw)), and we really don't put our money where our mouths are regarding free & open trade, BUT, the Yuan should absolutely be allowed to float. We've built up a great deal of wealth here due to that peg that's really financed by the Chinese, and so in a way belongs to them (once the interest payments to them are made), not us. The longer that any force save the market determines the dollar/yuan rate, the more pain we're in for later when it does occur.

Russ said...

Except that our citizens benefit directly from that peg. And in the process, politically, we benefit from that peg, as teh Chinese increasingly are forced to build their economy around exports...

yes, the later the float happens, the more pain we're in for... but it's not that much -- because the "market" dictates that price solely to the degree that monetarist financial policies in both our countries allow.

Anonymous said...

what's wrt?

jimdesu said...

"with respect to".

Russ, as a currency trader (part time), I just have to say it's a little more complicated than that. :)

Russ said...

Explain?

jimdesu said...

The monetary policy of a country doesn't have the power to affect rates directly -- you can't just suddenly decide you're going to have a weak currency (or a stronger one) without either A) intervening in the market, like the Bank of Japan does, which, while able to temporarily devalue the currency, actually strengthens the tide against itself (hence their inability to stop intervening, now that they've got themselves against a cliff vs. USD), or, B) reducing or increasing the money supply. The latter can be done of course: that's Greenspan's job. BUT, you can't just do so to muck with your currency prices, for the simple reason that you've got an economy attached! Greenspan could make the USD more valuable by raising long-term interest rates instead of just mucking about with short rates, but then you take the wind out of the sails of the economy.

Now, when it's time for said correction to be made, and the market distortions to be smoothed out, the economy will take a hit. While Greenspan's not in charge of the economy (people seem to forget he's just in charge of the money supply--big difference), he still can't just decide to pull away the credit needed to pull us out of recession so easily, because of the adverse affects that could have on prices. This is also made worse by the fact that we're near the edge of the biggest risk-tolerance bubble we've ever experienced. Once all those variable-rate mortages that people can barely afford (esp. the folks speculating on income property)...

jimdesu said...

start to be challenged, then the huge positions underwritten by FannieMae &al, won't be looking so good, and mortgage rates will then go up, because folks holding traunches of mortgage-backed securities also happen to be among our biggest creditors. To artificially raise interest rates to help the currency would be to exacerbate this trend, and make it overshoot. Contrariwise, to weaken the currency by lowering interest rates both postpones the credit-bubble correction (bad) and simultaneously lowers the amount of foreign investment in the U.S., which would be during a scenario when Asian central bankers would already be repatriating their capital (worse).

Governments have learned to their perils not to attempt to distort currency prices.

jimdesu said...

(and, oh, btw, can I hope/assume that the residences on Burning Tree lane are w/ fixed-rate mortgages, hint hint?) :)

Russ said...

No, mine's variable: but we're in an aggressive pay-down, and I ran the numbers. As long as we don't have to re-do the roof again, we can afford to take increases for the next three years and still break even just on the interest rate. We ain't doing a 30-year paydown any more, the interest involved is most one's retirement.

Rufel said...

Jim: Yeah, fixed 30-yr mortgage. The interest's kinda sucky (6.5%) because it's an FHA (closing costs bit deep into the down payment allotment so we had to go FHA instead of conventional), but we're very aggressive in paying extra towards principle (as in up to $2000.00 extra on top of the minimum monthly payment) such that the mortgage original balance of $114K is now sitting just below $95K. We're seeing if we can pay this sucker off in five years.