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谢国忠

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麻省理工学院经济学博士

个性介绍: 1960年出生于上海,1983年毕业于上海同济大学路桥系,1987年获麻省理工学院土木工程学硕士,1990年获麻省理工学院经济学博士。同年加入世界银行,担任经济分析员。在世行的五年时间,谢国忠所参与的项目涉及拉美、南亚及东亚地区,并负责处理该银行于印尼的工商业发展项目,以及其他亚太地区国家的电讯及电力发展项目。1995年,加入新加坡的Macquarie Bank,担任企业财务部的联席董事。1997年加入摩根士丹利,任亚太区经济学家,2006年9月辞去该职务。

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the natural bottom   

2008-11-24 17:41:36|  分类: 言论 |  标签: |举报 |字号 订阅

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The Natural Bottom 不能承受之轻


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The hyped G-20 Summit in Washington disappointed. It removed the lasthope for a coordinated global approach to handling the financial andeconomic crisis that is haunting the global economy. The result speaksvolumes about the current crop of leaders around the world and theantiquated power structure that governs the global economy. The rapidcontraction of the global economy will likely continue into the firstquarter of 2009. The second quarter of 2009 may still see somecontraction. The global economy may stabilize in the third quarter of2009, but battered and directionless.

First, I have a few goodthings to say about the Summit. By bringing the largest and wealthiestemerging economies, the world is recognizing that any future structurefor governing the global economy must include them. The G-7 has lookeddecidedly out of date during the Crisis. They are supposed to representthe OECD or developed block that still account for 70% of the globaleconomy. But this group accounts for less growth than developingcountries in the past five years in real and nominal terms. Equallyimportant, emerging economies hold most of the foreign exchangereserves. How to deploy the money would be the key to solving thiscrisis. The Summit is the beginning of ditching G-7. What to replace ithasn't jelled.

G-20 looks too big to be effective in makingdecisions. It should be cut down by half. From the OECD side, the US,the UK, France, Germany, and Japan can represent the block effectively.From the developing economy block, the four BRIC countries plus SaudiArabia can represent it effectively. Saudi Arabia can represent theinterest of OPEC countries. France and Germany can represent theeuro-zone. G-10 may be small enough for effective decision making.However, any effective global body for decision making would come toolate for tackling the current crisis.

Second, the Summit gaveverbal commitments to keeping national borders open to trade andinvestment. This is reassuring that the Smoot-Hawley Tariff Act of the1930s would not resurface to cause another Great Depression. Knowingwhat happened seven decades ago, the big economies like the US, Europe,Japan, and China are unlikely to repeat the same mistakes. Further, therole of multinationals has changed the political calculation over freetrade. Seventy years ago, the locations of production and ownershipwere mostly identical. Hence, both rich and poor benefited initiallyfrom blocking imports. As others retaliate, everyone eventually becameworse off. Most trade in the world is between emerging and developedeconomies done by multinationals based in the developed economies.Blocking imports would immediately hurt capital in rich countries.Capital and labor wouldn't agree on protectionism in developedcountries even not taking into consideration of retaliation by othercountries.

The verbal commitments, however, don't rule outisolated protectionist measures that aim mostly at China. Roughly halfof the anti-dumping measures in the world are aimed at China. The USjust imposed additional safety requirements on children's products fromChina, and the EU 60% tariff on candles and 50% tariff on non-alloysteel wire products from China. These measures happened at the sametime as the G-20 promised to maintain free trade. Hopefully, thesemeasures don't signify a new direction contrary to the G-20 statement.

Despitethe positive developments, the Summit largely failed to satisfy marketexpectations. On the crucial issue of stabilizing the global economy,it failed to agree on a coordinated program on fiscal stimulus.Essentially, each country is left to consider its best option. Thebenefit from fiscal stimulus in the era of globalization can leak outthrough trade. For a small open economy, fiscal stimulus doesn't workat all. For large economies like China and the US most of the benefitsfrom fiscal stimulus can stay at home. When each economy decides on howmuch to stimulate, it will do less than optimal as the benefits don'tall stay at home. When the global economy is contracting like now, theleakage from one's fiscal stimulus is very large. Hence, few economiesare incentivized to stimulate. What works is for the global communityto coordinate their stimulus. Unfortunately, the G-20 couldn't do it.

Incontrast, monetary stimulus has a smaller tendency to leak out. Cuttinginterest rate tends to weaken one's currency, which protects thebenefit from monetary stimulus at home. The main reason that mostcountries rely on monetary stimulus is that they are already runninglarge fiscal deficits and don't want to encounter political resistancefor more debt issuance. Monetary stimulus seems to incur no cost atfirst glance. As I have argued in this page before. Cutting interestrates doesn't stimulate demand, as asset deflation has destroyed theequity base for households or businesses to borrow. It merely makes iteasier for banks to carry bad assets through lower carrying costs,lessening the pressure for selling bad assets and stretching theadjustment process. The negative effects of monetary stimulus may notbe immediate but can surface in future. The bubbles under the Greenspanyears originate from his penchant for monetary stimulus. Theconsequences are ravaging the global economy today.

The currentwave of monetary stimulus lays the ground for inflation in the comingyears, I believe. The deflationary effects from the asset deflation aretemporary. They shift the demand curve downwards and decreaseinflationary pressure. However, as businesses cut production inresponse to lower profitability, the demand weakness is no longerdeflationary. The increased money supplies that are temporarily hoardedwithin banks could release through unexpected channels. Another wave ofcommodity inflation or wage increase through labor union demand couldrelease the inflationary impact of the monetary growth.

A betterand more equitable way to print money is to distribute cash amongpeople evenly. Some households and businesses borrowed too much duringthe bubble. There are three ways out: (1) working it off overtime likein Japan, (2) bankruptcies like the US in 1930s, and (3) inflation likeGermany in 1920s. The United States has not thought through which wayit is going. It will not follow Japan's path. I don't think Americanswill stick to their mortgages under a negative equity situation. It isnot American culture. It would be either bankruptcy or inflation. TheFed is staving off bankruptcies by bailing out banks and increasinglynon-financial businesses. So it is heading to an inflation solution.

Inthe 1920s German businesses took on too much debt during the FirstWorld War. They pushed its central bank towards an inflation solution,which Keynes erroneously blamed on the payments to the World War Ivictors. The chaotic process, probably on purpose to hide the centralbank's true intentions, led to hyperinflation. The resulting chaospaved the way for the NAZI party to rise to power. In contrast, theUS's willingness to accept bankruptcies pushed the country towardsinstitution building, which laid the foundation for a gigantic USeconomy and its superpower status. History is not kind to the inflationapproach.

For the inflation approach to work, it needs to betransparent and equitable. A central bank should announce how muchmoney it prints and distributes it evenly among the population. Themoney growth shifts up inflation expectation immediately. All theprices of goods and services and wages will likely move up quickly toreflect the new reality. The real debt burden falls in line with theinflation. If the central bank is credible on its printing target,inflation will slow quickly after the initially spurt.

Iwouldn't count on such a rational approach to debt write-off. Politicswon't allow it. Instead, all the central banks in the world will cutinterest rates and, as interest rates are close to zero, accept lowquality assets for lending to banks, similar to what the Bank of Japandid. The inflationary impact of the monetary growth would betemporarily suppressed by weak demand and banks' inability to lend.When the banks can lend again, inflation will surge.

Theleadership failure that is so apparent now all over the world has agenerational twist to it. The baby boomers that were born after WorldWar II pretty much run all the major economies in the world ingovernments and big companies. They have lived during extraordinaryprosperity. The past recessions, even the stagflation during the 1970s,were quite mild by historical standards. In particular, the past twodecades since the Berlin Wall fell were extraordinarily prosperous. Theleaders that rose during this period were all very optimistic.Unfortunately, optimistic people are not the smartest people. Indeed,optimistic people are usually not very smart. But they rise to the topduring prolonged prosperity that rewards optimism. When the catastrophearrives, they are not equipped to handle it. As the crisis discreditsthem, a new generation of leaders, hopefully smarter, will rise to thetop, and the right decisions are made. Hence, the solution to thiscrisis may require a leadership change. The US took the first step.Others may follow over the next 12-18 months. The political processsuggests that the solution to the crisis will take time.

Thesaddest thing about the Summit was how France and Japan dominated thelimelight. The former championed a global super regulator. The laterdoled out $100 billion for the IMF. France and Japan are greatcountries with wonderful cultures. But, they represent the past, notthe future. Their tendencies are to enforce equal outcome rather thanopportunity. China and the US are much more in tone with the future.The United States is not strong enough to run the world on its own. Analliance between China and the US could. Unfortunately, neither countryis embracing the idea.

What will happen and what should happenare usually quite different. I have mentioned three elements on whatwould likely unfold on policy front: (1) cutting interest rates toomuch and degrading central bank balance sheets, (2) stimulatingfiscally too little, and (3) political changes over next 12-18 months.On the economic front, the rapid contraction of the global economy willcontinue into the first quarter of 2009. The second quarter of 2009will probably see much slower contraction. Stability may return by thethird quarter of 2009. While economic stability may return in theforeseeable future, meaningful growth is not visible yet. The growthdriver for the global economy-the US's consumption and China's factorybuilding is unhinged and can't be put together. The world will struggleto find a new growth engine.

Financial markets will continueto fluctuate wildly over the next three months. When one falls off acliff, it is most frightening during the fall. One kicks, screams, andfantasizes the pain when hitting the ground. When one hits the ground,it may not be as bad as imagined. It could be a few broken ribs or aconcussion. Financial markets are now in the falling mode. In the firsthalf of 2009, when the global contraction slows or stops, the marketswill probably calm down. Bottoming, however, is different from thebeginning of a bull market. Only a new growth cycle can start a newbull market.

The dollar and government bonds have performedwell during the recent turmoil. The flight to safe havens has supportedboth. The unwinding of speculative positions in the emerging economiesand commodities has further supported the dollar. The dollar has been afunding currency for such positions. The unwinding increases demand forthe dollar. However, the factors that support both asset classes aretechnical and temporary. Fundamentals are not good for either. Someargue that Japanese yen performed very well after its bubble burst inearly 1990s and the dollar could follow the same path. The comparisondoesn't work. Japan's bubble was funded by local capital. When itburst, domestic demand decreased and trade surplus bloomed. Withoutsignificant domestic demand for foreign assets, demand for yenincreased with asset deflation. Yen only came down when foreignersborrowed yen to speculate in other assets.

The US's bubble wasfunded by foreign capital. As the bubble bursts, foreign demand for theUS assets will decline. The bursting bubble decreases the US domesticdemand and, hence, the need for foreign capital. But, the US is rampingup fiscal stimulus much quicker than Japan, which offsets the demandreduction from asset deflation. The position for the dollar now isconsiderably worse than for yen fifteen years ago. The supply offoreign capital will probably decline quicker than its need for it. Asother economies engage in fiscal stimulus, their surplus capital willdrop. The dollar may continue to appreciate in the next two to threemonths. It may weaken sharply afterwards when the carry trades are allunwound.

Government bonds may be another bubble that will burstsoon. Even though many analysts are talking about deflation, inflationreadings in the US, the UK, and Europe are still quite high. Inflationis a lagging variable and could drop further from here. Still, the highprices for government bonds cannot be justified on the likely inflationscenario in the next few years. Further, fiscal stimulus will increasethe supplies of government bonds dramatically in the coming year.Globally, the increase could be over $3-4 trillion. Until growth comesback, the increased supply may remain. Bonds could slip into a big bearmarket in 2009 like stocks in 2008.

I remain positive on goldand energy. While the global economy is contracting rapidly, energyprices are undershooting. The longer term story for energy remainspositive. China and India's development will greatly increase energydemand for the next decade. The supplies, especially oil, won't be ableto keep up. All the big oil companies report that their majorproduction fields are declining in yield. The positive story for energywill change when nuclear power has grown sufficiently to replace fossilfuel. That will probably take two decades or longer.

Gold is asubstitute for currency. As central banks around the world expand theirbalance sheets rapidly, gold should do well. The unwinding of carrytrades is negative for it. As dollar appreciates with the unwinding ofcarry trades, gold has declined in line with dollar's rise. When theunwinding is done and dollar begins depreciate, gold should resume itsbullish trend. I think gold could make new highs in 2009. The bullstory for gold will end quicker than for energy. When central banksbegin to raise interest rates, possibly in 2010 in response to risinginflation, gold may slip into a bear market. For now, gold still looksbullish.
 

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