2010-11-11

Andy Xie delivers common sense on QE2

A lot of has been said about QE2, but Andy Xie sums up the policy failure quite well in Paradigm Lost. Here are some gems:
The view that the U.S.'s problem is insufficient demand is deeply flawed. The U.S. is running a massive trade deficit. This is usually a sign of excessive demand. If one looks at the world with this perspective, the U.S. should experience a weak economy for an extended period of time to decrease its trade deficit. Geithner and Bernanke believe the deficit can be addressed through dollar devaluation. If the monetary stimulus works, it will lead to a bigger trade deficit. As I will discuss below, the weak dollar will serve to boost the trade deficit through a rise in commodity prices, which will increase the U.S. trade deficit.
Two ideas being refuted here. One is the insufficient demand canard, mostly proposed by Keynesians. The other is the idea that a weaker U.S. dollar can boost exports, but as the Japanese example shows, there's a lot more to exports than currency value. The U.S. is not competing to make low cost products such as sneakers and t-shirts, it is competing in areas such as aerospace and software.
In rich countries like the U.S., a large proportion of its population lives under third world living standards. In China or India, a significant proportion of their populations live with first world living standards. A convergence is occurring with similar ratios of living standards across the world. Moreover, one can tell where pressure is more acute.

In developed countries, the pressure is worsened by high living costs due to regulatory constraints. To lessen the social pressure, they need to lower the living cost for low income workers. Wal-Mart, for example, is one manifestation of that force. It employs people at third world wages and offers goods at third world prices. This market solution to the rising inequality is often thwarted by regulations. A society that chooses this option must have sufficient income redistribution for those who earn third world wages to be able to pay for first world prices.

Europe is in that camp. Its policies are consistent. Through corporate welfare Japan is in that camp too. The U.S. wants its low income people, i.e., most of its population, to enjoy first world living standards but doesn't have to the means or policies to make it happen. Instead, it tries to juice up growth to achieve this goal. But, its success depends on the businesses' willingness to pay its workers first world wages. The evidence says businesses are unwilling. The U.S. policymakers keep thinking that it's a demand issue and embark on policies that seem irrational to others and scare the whole world to death.
We are starting to see the early signs of strong anti-globalization backlash in the U.S.; a recent poll showed the Tea Party voters opposed to free trade. Andy goes on to predict QE3, read more Paradigm Lost if you are interested.

Speaking of QE3, CLSA's Chris Wood Continues To Look Toward QE3:
GREED & fear’s fundamental view remains that there will continue to be no Fed rate hike and that, sooner or later, Billyboy will be implementing a third wave of quanto providing American politicians allow him to do so.

If Billyboy succeeds in precipitating releveraging of the US economy he will for a time at least be treated as a hero until the subsequent collateral damage of his policies becomes obvious. Still GREED & fear has yet to come up with any hard evidence that releveraging is about to happen.

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