Only Cask Wine From The Goon Region Allowed to Be Called Goon

Published by Anonymous (not verified) on Fri, 01/11/2019 - 8:11am in

goonsack-619-386Winemakers from the Goon region of South Australia are today celebrating after international trademark laws were changed to allow only cask wine from the region to be labelled as “Goon”.

“If you want to release a “Goon” style cask wine from grapes not grown in the Goon Valley it must now be labelled as “sickly tasting cheap piss easily carted from party to party by swaying teenagers”,” said Charles Chunder, president of the Goon Winegrowers Board. “We’ve spent many years building up the reputation of our product and we want kids who are pooling their pocket money to buy a 4 litre cask to feel confident they are getting an adult to buy them the real thing.”

“As long as it gets me shitfaced I don’t care what they call it,” said renowned goon connoisseur James “Simmo” Simpson. “As long as it tastes roughly the same going back out as it does going in I’ll still drink it.”

Wines with the Goon label are now likely to attract a premium price of about 50 cents extra for a 4 litre cask, provided they contain the minimum requirement of 14% methylated spirits.

Peter Green

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Asia-Pacific Trade Deal: Trading Away Indian Agriculture?

Published by Anonymous (not verified) on Tue, 22/10/2019 - 3:55am in

Colin Todhunter On the back of Brexit, there are fears in the UK that a trade deal will be struck with Washington which will effectively lower food and environmental standards to those of the US. At the same time, it seems that the Transatlantic Trade and Investment Partnership is being resurrected and could have a …

Squeezing a Balloon

Published by Anonymous (not verified) on Thu, 26/09/2019 - 8:50pm in


trade, USA, Asia, China

Via the Financial Times I have read the Asian Development Bank Asian Development Outlook 2019 Update. The outlook has an interesting section on the impact of the US-China trade war on the region. Let me simply quote the relevant paragraph: “Recent trade data also provide evidence of trade redirection. In the first 6 months of 2019, US imports from the PRC fell by 12% from the same period in 2018. At the same time, US imports from the rest of developing Asia rose by about 10%, with notably large increases of 33% for Vietnam; 20% for Taipei,China; and 13% for Bangladesh” (page 14). I also copied and pasted the figure in the following page:

This was to be expected. Of course trade diversion is not automatic, nor costless. Supply chains need to be reorganized, bottlenecks may appear. But it is obvious that as long as US demand for the goods produced abroad remains strong, if the price of these increases in China, the demand will look elsewhere. Now, the US has been recording substantial negative net lending (the sign of an excess of domestic demand over supply) since at least the early 1990s:

The source of this excess demand has not always been the same. Sometimes corporations, rarely households (most notably in the run-up to the crisis), and most of the times the government.

In particular, in recent years households have experienced excess savings, initially joined by corporations which then gradually went to equilibrium. The government is keeping demand high, and as a consequence the trade deficit alive.

The tariffs on China, in this context, are just like squeezing a balloon. As long as US domestic demand remains strong, compressing Chinese imports simply pops imports from Vietnam, or Bangladesh, or who knows what other country next. As long as American excess demand will persist, somebody elsewhere will provide the supply for it. Reducing bilateral trade deficit with China is not a solution to persistent excess domestic demand.

Of course, the US could impose barriers to imports from all countries. This would solve the problem and reduce the trade deficit. Higher import prices and competition between households, firms and the government, would reduce purchasing power and, together with excess domestic demand, the welfare of American voters. Mr. Trump should try this before November 3rd, 2020.

Should NATO Exist? Will It?

Published by Anonymous (not verified) on Sat, 21/09/2019 - 1:58am in

One of Trump’s constant cries is that American allies aren’t spending enough on their militaries and that the US is, thus, carrying them.

While there is a temptation to scorn this argument because it was made by Trump, it has a fair bit of truth to it, as Matt Stoller suggested today:

The American military umbrella is a bad deal for America and a good deal for our “allies.” Japan gets protected channels to Middle Eastern oil, for free. Germany gets protection from Russia, for free. They all export to us at terms unfavorable to our own industries/middle class.

The problem with this is that it is, well, true.

And that Europe “needs” America for defense against Russia is absurd:

Let us be clear, the EU’s population is 508 million. When the UK leaves, it will be 447 million.

Russia’s population is 143 million.

The EU minus Britain has a GDP of 18.1 trillion (purchasing power parity), Russia has an economy of 3.5 trillion (ppp). Germany alone has a GDP (ppp) of four trillion.

If Europe “needs” the US, it’s because it can’t be bothered to raise a proper army. That’s all. It is genuinely free-riding.

Chinese and American flags flying together

But then NATO is a large part of why Russia is a “threat”. The expansion of NATO, which Bush Sr. promised Gorbachev would not happen, is a large part of why Russia has armed up.

It’s not clear that NATO should even exist. Its purpose was to resist the Warsaw Pact and the USSR, neither of which exist. Russia has a lot of nukes, and is relatively strong militarily, but it is no USSR and has no grand alliance facing NATO. It is not a threat unless terribly mismanaged. (Which, I suppose, it has been.)

Disband NATO. Let the Europeans take care of their own defense, or lay prostate before the Russians as they choose.

Japan is a trickier proposition. What American military presence there does is simple enough: It prevents Japan from needing its own nuclear weapons. The same is true of American bases in South Korea. Leave and those two countries have to nuclearize or become Chinese satrapies (and Japan will need a much larger navy).

It’s also worth noting that the US didn’t start protecting “Japan’s oil.” The US needed foreign oil too; it is only recently, under Obama, that the US has again reached petrocarbon self-sufficiency and is able to say, “We’re protecting other people’s oil.”

WWII was won by the powers who had access to more oil. Generals and admirals at the time understood the war was, to a large extent, about oil.

America may not need foreign oil now, but it did for decades and that is why it protected maritime oil trade.

In general, however, a US withdrawal from its forward bases will be a good thing. A rebalancing of trade will also be a good thing, though it will hurt as it happens (Trump is not doing it well). Deliberately offshoring and outsourcing the US (and Britain’s) industrial base led, more or less directly, to Trump and other social ills. It created a group of people who have lost for 40 to 50 years. Their parents had better lives. They had better lives. They know it. You cannot lie to them with BS statistics and pretend otherwise.

So they are willing to vote for and support anyone who seems like they will wreck a system which doesn’t serve them. Maybe what happens will be worse, but what’s happening right now is shit.

This is not contradicted by Trump’s support from red-state elites. They are also scared, because they also know their situation is precarious and that power and wealth has flowed away from them. And they rule over Hell. It isn’t always better to reign in Hell.

So the world is changing. It was changing before Trump: The Trans-Pacific Partnership was intended to be a trade bloc AGAINST China.

Note carefully Stoller’s hostility to China. It is constant. The American elite is finally reorienting. They don’t see Russia as a primary threat. They’re moving away from caring about the Middle East as they now have enough oil of their own and see a post-oil future coming. They know the rising great/super power is China.

They want to reorient their alliances against China. The price of keeping NATO will be keeping China OUT. When Germany said they wanted to do more business with China, Stoller was angry and said it was an argument against NATO. No Huawei, no China.

The world is very likely to divide into trade blocs–probably two, maybe three.

China rises. The US moves to protect its position.

Great power politics continue, as they ever have.

There is no end to history, save an end to humans. Only fools ever thought so.

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Rethinking Britain – How to build a better future

Published by Anonymous (not verified) on Mon, 09/09/2019 - 5:40pm in

Of the nineteen UK governments since the Second World War, only two have torn up the rule book and tried to build a better future, instead of simply recycling the tired slogans and policies of the past. The two governments that did try radical change – not always successfully – were those of Clement Attlee in 1945 and Margaret Thatcher in 1979.  We are therefore well overdue for another major policy rethink, aimed at solving the problems we have now – largely as a consequence of Thatcher’s legacy – rather than endlessly trying to reignite the ideological battles of the past. That’s why we concluded it was high time for Rethinking Britain: Policy Ideas for the Many.

Rethinking Britain is not only for the many – it’s also written by the many. As a result, it doesn’t set out the vision of one or two people, but instead offers the assessment of a wide range of experts, who are working in or studying the areas we cover. We not only set out the problems and suggest policy solutions to address them. Our aim is to help improve life for people living in today’s Britain. Between each set of policy ideas, you’ll also find interludes.  These draw upon real-life stories of people in Britain who are experiencing unresolved difficulties that should be considered unacceptable in any developed economy or civilised society – and we suggest how these problems could be solved, too.

Although some depressing situations are described, our overall approach is extremely positive. Instead of denying that there are problems – or ignoring them, as many politicians have done – we take a much more “can do” approach to building the society that most of us would want to live in. That leads to another significant point: Whilst Attlee’s 1945 government put people and society at the centre of its policy ideas, less than forty years later, Thatcher’s administration reversed this, focusing on the individual, privatization and the wealthy. This raises the question: “In whose interests should the economy be run”?

The shift to individualism, private profit maximization and an obsession with “free” markets resulted in serious wealth for the few – and runaway inequality and poverty for the many. It’s therefore not hard to guess where those contributing to Rethinking Britain are coming from!  We strongly believe that a society that produces healthy, well educated, strongly motivated people – who have, or can realistically hope for, a good standard of living – will also help to generate a powerful and dynamic economy.

The post-1979 dogma – that the British government should play as
small a part in the economy as possible – is also misguided. Far too much
capital is being used for short-term, speculative purposes, whilst not enough
is finding its way into the development of sustainable businesses that provide
long term employment and pay decent wages – not the hand to mouth existence of
a zero hours contract. In other words, the economy should work for the many,
not just the few.

Another theme that runs through Rethinking Britain is the concept of citizenship – where sets of rights and obligations mean that you are indeed part of something bigger than yourself. This is the polar opposite of Thatcher’s point of view, that there is “no such thing as society”. Many of her policy ideas were developed in the context of the Cold War – which came to an end thirty years ago; and it’s time for her policy ideas to do the same.

By investing in Britain’s people, we can build a stronger, more cohesive society – which will underpin a more vibrant economy. Rethinking Britain shows how.

Photo credit: Flickr/Christian Reimer.

The post Rethinking Britain – How to build a better future appeared first on The Progressive Economy Forum.

The high price of dollar safety

Published by Anonymous (not verified) on Wed, 28/08/2019 - 6:33am in


saving, savings, tax, trade

The world is saving like crazy. Corporations are building up cash mountains that they can’t or won’t invest in expanding their businesses. Individuals are building up pensions and precautionary savings. Governments, especially in developing countries, are building up FX reserves. The “savings glut,” as former Fed chairman Ben Bernanke dubbed it, shows no signs of dissipating. It is sloshing around the world looking for a productive home. But there isn’t one - or at least, not one that offers the safety that fearful investors desperately crave. That, fundamentally, is what is driving down the returns on assets.

It is also the primary cause of the wide US trade deficit. The President likes to think that the reason for the US’s persistent trade deficits is unfair trade practices and currency manipulation. And for some countries, these are undoubtedly contributing factors. But the biggest reason by far is the global dominance of the dollar, and above all, the pre-eminence of dollar-denominated financial assets as the world’s preferred savings vehicles.

The world loves to save in dollar-denominated “safe assets” – not only the dollar itself, but also US Treasuries, mortgage-backed securities. dollar-denominated debt issued by other governments in good standing, and dollar-denominated blue-chip corporate debt. When global demand for these assets rises and/or their supply falls, dollars become relatively scarcer internationally, both because foreigners increase their holdings of dollars and because they buy or borrow more dollars to buy other dollar-denominated safe assets. This drives up the dollar exchange rate against all other currencies. It also depresses yields, both on dollar-denominated safe assets and on all other financial assets. Thus the strong dollar and negative yields are both primarily caused by the world's dollar saving habit, not by its trade practices. And the dollar safety quest intensifies as political tensions rise.

You might think that the high price of dollar-denominated safe assets would discourage investors. But a new paper presented at Jackson Hole last week finds the opposite. When the price of dollar-denominated safe assets rises, so does demand for them:

The equilibrium convenience yield on dollar-denominated safe assets (DDSA) depends on the marginal willingness to pay for the services of DDSA, and on the supply of these services, i.e. the stock of DDSA. As the price of these services increases, the quantity foreign investors demand increases. The supply of DDSA is upward sloping because other issuers (governments, banks and corporations) supply more DDSA as the price for these services increases.

Why does demand for DDSAs rise as the price rises? Simply, because of fear of scarcity. The authors discuss how investors respond to Fed monetary tightening:

When the Fed tightens, the bond markets infer that a reduction in the supply of safe dollar assets is imminent. As a result of this supply shift, the marginal willingness of global investors to pay for the safety and liquidity of dollar-denominated assets - as measured by the convenience yield on these assets - increases, leading to an appreciation of the dollar in response to this increase in the convenience yield (even when controlling for interest rates). 

This is similar to how “Veblen goods" behave. Normally, when the price of a good rises, demand for it falls away until the price stabilises. But with Veblen goods, the opposite happens: rising prices feed demand. Veblen goods are typically luxury items to which (rich) investors are attracted because of their scarcity: making them even more scarce raises demand. So it seems DDSAs are luxury financial assets for which investors fiercely compete. And US Treasuries are the most luxurious of all. The authors show that synthetic equivalents of US Treasuries don’t command equivalent prices: there is a premium attached to a real US Treasury.

The "luxury" nature of US Treasuries lowers the US’s long-term borrowing costs. This has been known for a long time: back in the 1960s, France’s Finance Minister (later President) Valéry Giscard d’Estaing dubbed it the US’s “exorbitant privilege.” But the persistent inflows of capital that arise from global demand for DDSAs are not without cost. As Michael Pettis explains, they force the US either to borrow much more or tolerate much higher unemployment. Thus far, US governments – and the Fed, through its dual mandate – have always preferred debt over unemployment.

But the US is becoming less tolerant of the world’s dollar saving habit. The Great Financial Crisis of 2008 showed that although the US can borrow cheaply from the rest of the world in good times, when it all goes horribly wrong the rest of the world looks to the US to make good its losses. This responsibility, which the economist Hélène Rey calls the US’s “exorbitant duty,” is resented by many Americans. They didn’t agree to be the world’s “insurer of last resort,” and they object to paying up. And a growing number of Americans also resent the US’s role of “consumer of last resort” to the rest of the world. They see the US’s persistently wide trade deficit, high private and public indebtedness, and haemorrhage of good jobs to foreign shores, as an “exorbitant burden” of which they would like to be relieved.

But how to relieve it? Two senators think they have a solution. They have proposed a Bill that would mandate the Fed to impose a variable charge on inflows of capital over $10,000. The idea is that the charge would discourage investors from buying dollar-denominated assets, particularly on a short-term basis. Dollar demand would fall, the dollar exchange rate would weaken, and the trade deficit would narrow. The Bill proposes that the charge should be set at such a level that the trade deficit would shrink to within 0.5% of GDP from its current level of around 3% of GDP. That is quite a drop.

Michael Pettis thinks that taxing capital inflows would close the trade deficit as effectively as import tariffs without their distorting effects. "Whereas tariffs subsidize some U.S. producers at the expense of others, taxing capital inflows would benefit most domestic producers with the costs borne primarily by banks and speculators," he says. And he continues:

Unlike issuing tariffs, levying a tax on capital inflows doesn’t disrupt value chains to anywhere near the same extent or distort relative prices on tradable goods. Tariffs favor some sectors of the productive economy over others, so they can be highly politicized as well as highly distorting to global value chains and the role of U.S. producers. Taxing capital flows works by forcing financial adjustments—by adjusting the value of the dollar, for example, or by reducing debt—so such a tax is likely to be both less politicized and less distortionary to the real economy. In fact, to the extent that trade imbalances are driven by distortions in global savings, taxes on capital inflows will even drive prices closer to their optimal level.

Pettis adds that since the charge would particularly discourage short-term flows, it would not need to be very large to be effective.

If this were any country other than the US, I would wholly agree with Pettis. But the US is the provider of safe assets to the whole world. There is no substitute for dollar-denominated safe assets, either as a safe savings vehicle or – importantly – as collateral for borrowing and lending dollars. The proposed tax on capital inflows therefore amounts to an attempt to force the rest of the world to give up its desperate quest for safety.

Personally, I think that the world's obsession with safety is the principal cause of what is now a decade of economic stagnation. I would like to see much less saving, especially by some developed countries whose almost religious belief in the virtue of accumulation is in my view creating dangerous imbalances and causing rising political tension. But the wounds from the financial crisis and the Euro crisis are as yet unhealed, and the world economy has other painful scars, notably from the Asian crisis of 1997-8. And the world is still suffering from a bad case of post-traumatic stress disorder: everyone is constantly on the lookout for the next crisis. In these circumstances, it is wholly understandable that people want to build up buffers to protect themselves from the terrible consequences of another crisis, and wholly reasonable of them to think the best buffer is a very large claim on the world's richest economy.

For this reason, I think it unlikely that a tax on capital inflows would significantly discourage investors from buying dollar-denominated safe assets. In fact as David Beckworth observes, the turmoil that such an attack on the “status quo” might cause could encourage investors to purchase even more dollar-denominated assets, driving down yields everywhere as money left the rest of the world and flowed into the US. I can't think of a faster way of bringing about the negative-rate universe that investors seem to fear so much.

The fact is that the US doesn't have the power to force the rest of the world to stop amassing claims on it. And attempting to force investors to reduce their appetite for dollar safety could perversely increase it. Until there is a viable alternative to dollar-denominated safe assets, the US is stuck with its role of "insurer to the world."

If the tax failed to discourage dollar-denominated safe asset investment, the dollar exchange rate would not fall. In fact since it would be more expensive to buy the assets, demand for dollars would rise, and it would rise even more if fearful investors fled into safe assets in response to the tax. This would be likely to drive up the dollar exchange rate. Perversely, therefore, this Bill could have the opposite effect on the dollar exchange rate from that intended.

I say “perversely”, but I actually don’t find this at all surprising. Looking at the whole problem through the opposite end of the telescope gives a different perspective. I like to regard America's debt not as its biggest liability but as its greatest export. So, let's  return to the concept of DDSAs - of all kinds - as a luxury export. They are hugely in demand, very expensive and there is never enough of them.

The Bill would impose an export tariff not only on genuine US Treasuries, but also on the private sectors’ cheaper substitutes, thus raising the general price of dollar safety. Raising the price of a luxury good is unlikely to discourage demand for it: indeed taxing DDSAs could even increase demand in much the same way as the Fed tightening monetary policy does, since it would send a clear signal that the US government wished to reduce the supply. So gross dollar inflows would increase and the dollar exchange rate would rise.

Alternatively, we can regard dollar safety as an essential good for which demand is completely inelastic because there are no substitutes for it. In this scenario, too, dollar inflows would increase and the dollar exchange rate would rise. Thus the Bill's aim could only be achieved if investors stopped looking for dollar safety. Frankly, given the present political turmoil, they are more likely to emigrate to Mars.

When dollar inflows increase, the trade deficit must, as a matter of accounting, widen. This might show itself as a fall in exports as foreign countries, faced with higher bills for safety and poorer returns on dollar safe assets, cut back on other imports from the US. Or it could show itself as a rise in imports enabled by a stronger dollar. Or both. Whatever. Unless demand for US dollar-denominated safe assets is very much more elastic than recent research suggests, taxing capital inflows cannot bring down the dollar exchange rate or narrow the US's trade deficit. It might even strengthen the dollar and widen the trade deficit.

This would be unfortunate, not only for the US but for the rest of the world. The dollar is pre-eminent in international trade and on international financial markets. More than half of all trade invoices are in dollars. Two-thirds of all securities issuance is in dollars. Nearly 90% of all FX transactions involve the dollar. Large amounts of corporate and government debt, notably in emerging-market economies, is in dollars. The world has become more reliant on dollars since the financial crisis, not less. So when dollars become more expensive, the whole world suffers.

Satisfying investors' craving for dollar safety comes at a very high price. The world desperately needs a lower dollar, but escalating tariffs on imports and taxes on capital flows are not going to bring it down. They are more likely to raise it, to everyone's detriment. And as the dollar rises, so does the global political temperature.

What is really needed is a new Plaza Accord. But international accords require international cooperation, and I fear that the belligerent attitude of the Trump administration means too much goodwill has been burned for this to be possible. All that seems to be left is that most futile of games - a tit-for-tat struggle which no-one can win, for which the price will be an ever-stronger dollar, ever-weaker global growth, and ever-lower interest rates. In a speech at Jackson Hole last week, Mark Carney warned about the risks associated with very low interest rates:

Past instances of very low rates have tended to coincide with high risk events such as wars, financial crises, and breaks in the monetary regime.

Let us hope that this does not come to pass.

Related reading:

Weird is normal
The deadly quest for safety 
Safe assets and Triffin's dilemma
The illusion of safety
On risk and safety 
The golden calf

Currency manipulation accusation against China not just “wrong now”, but fundamentally flawed

Published by Anonymous (not verified) on Sat, 24/08/2019 - 12:34pm in

By Alexander Beunder. Investigative journalist. Platform Authentieke Journalistiek, the Netherlands.    

Now that the dust has settled around the latest U.S.-China trade war spat, here’s something the Trump regime may want to evaluate before the next round: the fact that many economists and analysts refused to side with Trump and Mnuchin when they accused China of “currency manipulation”.

Initially, the story of Chinese currency manipulation was echoed around the world, when the Chinese yuan dropped 1,4% to the dollar on Monday, August 5. After US president Donald Trump responded by tweet that China was guilty of “currency manipulation”, the Wall Street Journal and others described how Beijing was “weaponizing the yuan”. China was obviously responding, some analysts said, to new import tariffs on Chinese products which Trump had announced a week before. The press paid even more attention to the story because of the diplomatic drama around it, as US Treasury secretary Steven Mnuchin rushed to officially declare China a “Currency Manipulator” and said to bring the matter to the International Monetary Fund (IMF).

It’s an accusation Trump (but before him, Obama) has been repeating for years. China’s central bank is supposedly keeping the value of the yuan to the dollar artificially low – by buying and holding on to dollar reserves – to make its exports cheap for the rest of the world. This creates an “unfair competitive advantage”, in the words of Mnuchin. Thanks to its cunning currency manipulation scheme, the argument goes, China enjoys a persistent trade surplus – exporting more than importing – while the U.S. suffers a trade deficit, hurting businesses and workers.

But fact-checking Trump’s statements has become a healthy habit among journalists. Several analyses quoted economists who disagreed with the latest accusations by Trump and Mnuchin. As The New York Times business correspondent Alexandra Stevenson noted, “many economists believe [China’s] currency should be weakening versus the dollar”, due to slow growth and the trade war with the U.S.. Another source, U.S.-economist Dean Baker, noted the 1,4% drop was large but “not that unusual” and can happen “without government intervention”. Even the annual review of China’s economic policies by the IMF, released after Monday’s accusations, concluded there is no sign of currency manipulation.

Still, several established correspondents agreed that the accusation was valid in the past. “China kept its currency weak a decade ago”, Stevenson wrote, but the yuan has now “strengthened to a level widely believed to be close to fair value”. Her colleague Eduardo Porter at The New York Times shared a similar view in an article which headlined, “Trump Isn’t Wrong on China Currency Manipulation, Just Late”. Bloomberg correspondent Noah Smith drew the same conclusion, noting China enjoyed a large trade surplus in the 2000s, but the “the country’s current account deficit has largely vanished”, after a peak in 2007.


Flawed economics

However, there may be something more fundamentally wrong with the currency manipulation accusation, and not just with the recent application of it by Trump and Mnuchin.

New York-based economist Anwar Shaikh and London-based economist Isabella Weber have been arguing for several years that the whole currency manipulation argument is based on flawed economics. Shaikh, an economics professor at the New School of Social Research in New York, and Weber, a lecturer in economics at Goldsmiths, University of London, published a working paper on the topic last year titled “Debunking the Currency Manipulation Argument”.

If they’re right, even the belief that China was guilty of currency manipulation a decade ago becomes questionable.

To understand what’s wrong with the currency manipulation argument we have to go back to the underlying trade theories, Shaikh and Weber explain. As currency manipulation can not be observed directly, economists look at other economic phenomena which, according to standard trade theory, are indicators of currency manipulation. A persistent trade surplus is the most important indicator because, according to standard trade theory, free trade would automatically eliminate trade imbalances. Hence, wherever a persistent trade surplus exists, it must be the result of currency manipulation, the argument goes.

The Chinese trade surplus, always positive since 1994, has been the central pillar of the currency manipulation argument, Shaikh and Weber note. Not just for academic economists; the U.S. Treasury uses persistent trade surpluses as official, legal criteria to determine whether a country is guilty of currency manipulation to gain an “unfair competitive advantage”.

But the proof is in the pudding, in this case, standard economic trade theory. If the theory is incorrect – which it is, according to Shaikh and Weber – the whole narrative collapses.

What’s wrong with the trade theory? The theory goes back to a famous model of the British economist David Ricardo (1772-1823), Shaikh and Weber explain. In Ricardo’s model and modernized versions of it, free trade ensures that, over time, no trading partner would enjoy a trade surplus or suffer a trade deficit. Imagine a country which would initially be more competitive in, let’s say, all sectors. Free trade would result in high exports and low imports (a trade surplus) attracting a massive inflow of money from foreign buyers. Such an inflow of money creates domestic inflation or an increase in the exchange rate, damaging competitiveness and eliminating the trade surplus. In a weaker, deficit country the opposite would happen: an outflow of money creates domestic deflation or a drop in the exchange rate, boosting competitiveness and exports and eliminating the trade deficit.

But the theory is fundamentally wrong, Shaikh and Weber argue. The “natural” result of a world in which trading partners enjoy different levels of competitiveness is not balanced trade. The “natural” result of free trade in such a world, they argue, is imbalance – trading partners with persistent trade surpluses and deficits.

Relying on classical economists like Adam Smith (1723 – 1790) and Roy Harrod (1900 – 1978), Shaikh and Weber present their alternative trade theory: in their version, the magical price or exchange-rate movements which would equilibrate trade in Ricardian models won’t happen. For instance, in a surplus country, large inflows of money due to excessive exports will not create domestic inflation or a rise in the exchange rate, because there’s something else that these flows of money do: move back to where they came from. Any oversupply of money a surplus country would receive would initially be saved in local banks and decrease the domestic interest rate. This would push capital towards other countries where it enjoys higher returns – indeed, to the deficit countries where the interest rate has increased due to an outflow of money.

Hence, a likely outcome of free trade is that surplus countries become creditors, and deficit countries become borrowers, and there are no automatic price or exchange-rate movements which would balance trade accounts.

This is, Shaikh and Weber note, an accurate description of the financial relation between the US and China, as China has become the largest creditor of the US. The only peculiarity, they explain, is that China’s public central bank is doing the lending (buying dollar assets) because Chinese capital controls prevent private investors from fulfilling this role. But these operations “might only mimic what would be the outcome of free capital and trade flows”, Shaikh and Weber explain. To label these monetary operations as the main instrument of a cunning currency manipulation scheme, as Mnuchin and others do, is unwarranted in their view.

So, if Shaikh and Weber are right, global imbalances in trade are simply natural outcomes of the free market, not of government interference. And if that’s the case, the currency manipulation arguments holds no water, as “we cannot infer from trade imbalances and from China’s purchase of reserves that the currency has been manipulated”.

No, Shaikh and Weber can’t exclude the possibility that China has intervened in the value of the yuan for purposes of competitiveness. Their main point is that the conventional criteria used by academics and the US Treasury to determine this – trade surpluses and deficits – tell us very little.

Perhaps more importantly, their message is to look at free trade itself to understand the roots of the trade deficit of the US and trade surplus of China. The real reason is surprisingly simple: “It is the lower costs in China that drive its trade surplus”, Shaikh and Weber conclude. It’s not Chinese currency manipulation which, as Trump complained in 2015, “makes it impossible for our companies to compete”. It’s simply Chinese competitiveness. It’s an argument which may be harder to swallow for those convinced of the everlasting power and competitiveness of the US economy.


Politics, not economic science

 However convincing their debunking of the economic evidence may be, Shaikh and Weber are well aware that in the political arena the economic evidence plays a secondary role. U.S. presidents like Trump repeat the accusation of currency manipulation because of politics, not economic science, they note.

It’s been a “general pattern” in US foreign policy for some time, Shaikh and Weber write, to accuse trading partners of currency manipulation when they are running a trade surplus with the US, typically followed by the “demand that they enter into bilateral negotiations on a wide array of market liberalization policies”. Booming economies like Korea, Taiwan, Hongkong and Singapore faced the same accusation of currency manipulation in the late eighties and nineties, Shaikh and Weber note. China has repeatedly been accused of currency manipulation by the US Treasury since the nineties, Weber adds by email, with increased intensity “since the rapid expansion of the US-China trade imbalance following China’s accession to the WTO in 2001”.

So the return of the currency manipulation argument today, at a time when the US and China are fighting over the terms of a new trade treaty, is not surprising. But it is alarming, Weber says, as the unfounded accusation “is another step towards escalating the trade war”.


This article was also published by Rethinking Economics.

The post Currency manipulation accusation against China not just “wrong now”, but fundamentally flawed appeared first on Economic Questions .

Johnson’s Fascistic Denunciation of ‘Collaborators’ with the EU

Yesterday Mike put up a piece commenting on Johnson’s Fascistic rhetoric describing those opposing a no-deal Brexit in parliament. Simply put, he described them as collaborators with the EU. The Blonde Beast said

There’s a terrible kind of collaboration as it were going on between people who think they can block Brexit in Parliament and our European friends, and our European friends are not moving.

We need our European friends to compromise and the more they think that there’s a chance that Brexit can be blocked in Parliament, the more adamant they are in sticking to their position.

As Mike points out, Johnson is falsely claiming that the ordinary people, who don’t want a no-deal Brexit, have teamed up with the EU. It also identifies his enemies as a unified cause, which is also one of classic features of Fascism. Following the infamous forgery, the Protocols of the Elders of Zion, Hitler viewed everything that he considered damaging to Germany to be part of a massive Jewish conspiracy. Financial capitalism, socialism, Communism and democracy were all parts of this conspiracy to undermine Germany and destroy and enslave the White, ‘Aryan’ race. As were decadent modern art, music, literature and unAryan scientific theories, like Einstein’s Theory of Relativity, because Einstein was Jewish.


Johnson hasn’t gone quite that far yet, and Mike points out that he isn’t a Fascist. But he is showing many of the warning signs. So much so that one tweeter put out a picture of BoJob with the caption ‘This man is the biggest threat to Britain since Adolf Hitler’. It’s an exaggeration, but a forgivable one, considering that BoJob’s Brexit is already wrecking British economy and industry, and that he and his backers in the Murdoch press are looking forward to a trade deal with Trump’s America which would see our agriculture and industry bought up by the Americans, including the Health Service, the welfare state dismantled, workers’ rights removed completely, along with our environmental protection laws. All so that BoJob and the elite rich can enjoy absolute unfettered capitalism and massive profits for their own businesses.

And I’m not surprised that Johnson is sounding like a Fascist. He’s a massive egotist, like Donald Trump, and both men are extremely authoritarian. Trump talked about having newspapers and press people, who criticised him shut down. Johnson, when he was mayor of London, spent millions of taxpayers’ money on three watercannon that were illegal in mainland Britain. And BoJob’s the leader of a highly authoritarian party. Under Thatcher the Tories had links with very unpleasant South American Fascist regimes, like Chile’s General Franco. The Libertarians in the party, including Paul Staines, used to invite to their annual dinner the leader of one of the Fascist death squads in El Salvador. The Freedom Association also wanted the suppression of trade unions, workers’ rights and the welfare state and NHS, and unfettered capitalism. It was very much freedom for the rich, and wage slavery for the poor.

And he’s supported by a fanatically authoritarian press. Remember how the Tory papers demonised the judges and lawyers, who had ruled against one of Tweezer’s Brexit plans as the enemies of the people. It was the classic rhetoric of authoritarian, Fascist regimes.

And you can bet that as opposition to Boris mounts, he and his backers in the media are going to become even more splenetic and Fascistic in their denunciations. They’re already demanding anti-democratic measures to get what they want. This is the suspension of parliament, as advocated by the Torygraph, so that BoJob can force through Brexit without opposition from MPs. Who are our elected representatives.

BoJob is a menace to British prosperity, British industry, British working people and British democracy. Get him out!


Trump Post-Brexit Trade Deal Will Bring Hardly Any Real Benefits

This is very revealing. According to the BBC World Service, a post-Brexit trade deal between Britain and America would only increase the economy by 0.1%. And that would be 15 years from now.

As the Skwawkbox and Mike over at Vox Political have both pointed out, this means that the Tories will have sold Trump and the American companies backing him our NHS, workers’ rights, and environmental and consumer protections for hardly anything. In fact, Mike points out that even the 0.1% growth may not happen, as the economy is already faltering, and so any gains made later may be swallowed up by the losses that are occurring now.

This is despite yesterday’s Times enthusiastically hyping Trump’s offer of a trade deal with America. Zelo Street effectively ripped that piece of propaganda apart by pointing out that we would only get the deal if we became America’s poodle, a point that was also made by one of the columnists in today’s I. The Sage of Crewe also refuted what Trump’s negotiator, John Bolton, and the Times clearly thought would be an attractive demonstration of the deal’s benefits. Bolton stated that it would be easy to make such deals quickly for manufacturing and industry, but that service sector would take a bit longer. Nevertheless, next year could see cheap American cars coming into Britain. The Sage of Crewe pointed out the other side of the coin: British cars would be undercut by cheap American imports.

I can remember when something similar happened to the motorcycle industry with the Japanese way back in the 1990s. This was when the Japanese economy started contracting and there wasn’t quite so much a market for their bikes. Their solution was to start exporting cheap bikes to Britain, which would undercut our own, domestically made machines. Even those produced by Japanese manufacturers over here. As you might expect, British bike manufacturers, including the management of Japanese companies over here, were extremely upset and started arranging meetings about what they could do about this threat to British industry and jobs. I’d be interested to hear if British car firms are planning something similar to combat the similar threat John Bolton is making to them. But guessing from the glowing way the Times was pushing Trump’s grotty trade deal, I doubt we’d read of one in that Murdoch rag.

But the Americans would wait until after Brexit before requiring us to fall in line with their policy over Iran and the involvement of the Chinese firm Huawei in the 5G network.

Put simply, this deal would make us into America’s poodle. We’d have our industries and agriculture picked off by the Americans for their benefit, as the Zelo Street article also points out. He also states that Bolton is lying through his teeth about Congress easily passing such a deal. Congress’ Speaker, Nancy Pelosi, has said that it won’t pass any deal unless the Good Friday Agreement is honoured.

The Zelo Street article concludes by stating that BoJob loves to say that Britain is a vassal state of the EU, but doesn’t mention how this deal would make us a vassal state of America by the back door.


And Mike and the Skwawkbox point out how the BBC hid the news that Trump’s deal would bring hardly any benefits to Britain by putting on the World Service. This is the Beeb’s service for the rest of the world, not Britain. Presumably the people actually affected by it don’t count. Mike concludes in his turn that its shows once again that the Beeb is the Tories’ propaganda arm, and wonders if Ofcom are aware of it?


I’m not surprised by any of this. The Americans were less than altruistic in the deals they made for their entry into the Second World War. They drove a very hard bargain with us after the War. They and the Russians both wanted the dismemberment of the British Empire so that their goods could be allowed into our former colonies. It was also thanks to their demands for payment that Newfoundland became a province of Canada. Before then it was another British colony. However, we had to give it, or sell it to the Canadians in order to raise the money to pay the Americans.

I’ve also met former members of the aircraft industry, who were also very bitter at the way America had demanded cutting edge technical information from this sector after the War. The Americans’ breaking of the sound barrier by the X-1 rocket plane, flown by Chuck Yeager, was a tremendous achievement. But it was solidly based on British research, some of which was, in its turn, based on captured German material. But the British project had to be closed down and its results and information handed over to the Americans as part of their price for coming to our aid.

Counterpunch and some of the American left-wing news sites on YouTube have also pointed out that the lend-lease arrangements under the Marshal Plan also weren’t altruistic. This was the American economic scheme to build Europe and the rest of the free world up after the War using economic aid. But there were also strings attached, which meant that the aid went chiefly to American companies.

You can conclude from this that the American state and capitalism drives a very hard bargain, and that such deals are very one-sided. As many left-wing sites have argued over and over again in their discussion of the ‘Special Relationship’. Which actually means far less to the Americans than it does to us. That was shown very clearly by Clinton’s reaction to German unification. This made Germany the strongest economy in Europe, and Clinton showed, as Beeb newsman John Sargeant managed to get the Prime Minister to acknowledge, that Germany was now America’s most important partner in Europe, not Britain.

And I’m also not surprised at the Tories and Murdoch ardently supporting this sell-out of our country. The Tories admire American capitalism and its lack of worker protection and welfare state. I can remember previous episodes where the Americans were promising a better economic deal if we abandoned Europe and joined them. And the Tories cheering such schemes nearly always owned businesses in America. And in fact, as far back as 1925 the Tories, or a section of them, were forming plans for the political reunion of Britain and the US.

And that shows exactly what Johnson and the Tories are like. Now and in the past, and I’ve no doubt in the future, they are willing to sell out British industry, the welfare state, our precious NHS and workers, all in return for the victory of unfettered capitalism and their squalid economic gain.

A Few Words On Argentina

Published by Anonymous (not verified) on Wed, 14/08/2019 - 4:25am in


trade, Argentina, IMF

Ok, so Argentina elected a neoliberal president. He went to deep austerity, removed capital controls and sought an IMF bailout.

Now it looks like a socialist may win and markets are freaking out, because he may default on some of the debt and re-institute capital controls.

Argentina’s problems have a long history, but it’s worth remembering this: before WWII, it was a first world country, with a standard of living about equal to Canada’s.

Argentina partially defaulted in 2001. One should  remember that that default was caused by following the conservative policy of pegging the Peso to the dollar, which any moron should have known would eventually backfire.

It is also worth remembering that when Argentina defaulted in 2001, it wasn’t actually allowed to. American courts wouldn’t let Argentina pay the creditors who allowed their debt to be reduced unless they also paid those debtors who didn’t take the deal.

We live in a stupid, perverse world where people don’t understand that there has to be a balance between debtors and creditors. Creditors are making a bet, and if they lend to the wrong entity, and it eventually can’t pay back, they should have to eat their losses. Don’t lend to people who can’t pay you back. Everyone knew that Argentina was going to have debt problems, every time, but they took the chance because they wanted high returns.

But the central financial system, the NY and London courts and the IMF act as debt collectors for people who want the upside of high payments from distressed borrowers without the downside of the chance of losing the money.

Worse, they act as enforcers for bad actors, who won’t cut deals, and expect to litigate.

Debtors may lose some money, but leg-breaking countries for rich debtors kills and impoverishes poor people.

Now none of this is to say Argentina hasn’t made mistakes. Flipping back and forth between neoliberals and socialists is stupid. Pick one, and suck it up. Electing Macri was stupid, but then being outraged when he does what a neoliberal technocrat would do: austerity and sucking up to the IMF is equally stupid.

Pick a governing philosophy and elect governments in that philosophy until the leading parties all follow it (like when Labour became neoliberal under Blair, cementing Thatcher’s victory.)

Right now Argentina is getting the worst of both worlds.

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