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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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obama or mccain: the dollar will weaken   

2008-09-18 15:55:08|  分类: 言论 |  标签: |举报 |字号 订阅

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Obama or McCain: The dollar will weaken 点击查看译文   

/ 謝國忠


The US is muddling through in its handling of the crisis. That makesthe election outcome potentially very important. 15 years ago, Japancut interest rate to zero to stabilze bankrupt financial institutionsand boost fiscal stimulus to stabilize demand. That led to a 'lost'decade, which allowed businesses and banks to slowly recover theirviability. It was actually slow transfer of government money tocorporate balance sheet. The equilibrium, however, was made possible bythe big trade surplus, i.e., high savings rate, which kept interestrate low depiste high fiscal deficit and yen strong despite zerointeres rate.



The US runs 5% of GDP in current account.The government debt level is already too high. Japanese solution is notviable. The only remaining weapon is the dollar. The US can printdollar and share the burden with the world. I think the newadministration will use it aggressively. The equilibrium for the USover the next few years is likely negative real interest rate, highinflation, and weak dollar. What upsets the equilibrium is a potentialbond market collapse. So, as long as the treasury yield remains low,the US has no incentive to keep dollar strong. Only when central banksdump treasuries that the US would change its policy.

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TheUS presidential election is entering its final weeks. Both Democratsand Republicans had their conventions and crowned their candidates.Some analysts call the election the most important since 1980. Thecomparison is certainly apt. The US was facing a foreign policy crisisas Iranian Revolutionary Guards held the US embassy staff hostages andsurging oil price caused stagflation. But, today's problems are moreintractable. Today's symptoms of stagflation and foreign policy crisisreflect deeper structural problems. The costs of healthcare and socialsecurity are the bombs that may explode the US economy. The USproperty-cum-credit bubble results from the desire to maintain livingstandard higher than what fundamentals could support. The bursting ofthe bubble should make the US face reality. But, it is not. Theresponse, so far, is denial. Then current administration is using thecentral bank to lend to failing financial institutions to keep themalive. Unless political changes lead to a different approach, the USwill likely stagnate like Japan before and with inflation.



Thetakeover of Fannie Mae and Freddie Mac is the latest example of theUS's muddling through strategy. It is a bailout and not a bailout. TheTreasury promises that it would bring back market confidence in the twoinstitutions, implying government guarantee for their credit. But, itpromises no costs to taxpayers, i.e., no bailout. It is hoping that themarket would believe the former and start to give them easy moneyagain, which leads to more money for the mortgage market, which mightrevive the property market, which would reverse the losses. What amarvelous scheme! But, it wouldn't work. The bubble is burst. A littletrick like this wouldn't stitch the bubble together again.



Thepolicies that Democrats and Republicans have promised in theircampaigns are not really addressing the fundamental problems. One USpolitician recently asked me at a brainstorming seminar what aforeigner like me thought the US should do. I opined that the US shouldspend less and produce more. That was taken as a surprise. The policycircle was talking up another fiscal stimulus package then. People whoare deep in a situation often fail to see the big picture. The US hasgot into the current situation from spending too much money. How couldthe problem be solved by spending more? Unfortunately, both parties arepromising more money for healthcare, education, bailouts for delinquentmortgage borrowers, and tax cuts, exactly opposite to what the USshould do.



As stagflation takes hold, the US willbecome much more defensive towards globalization. For a starter, weshould forget another global accord on increasing trade. The Doha Roundhas failed due to opposition from developing countries. The next USgovernment wouldn't look at it kindly, i.e., Doha is truly dead.Further, the US may back away from the existing free tradearrangements. One of the Clinton Administration's big accomplishmentswas getting the North America Free Trade Agreement ('NAFTA') thatintroduced free trade among Canada, Mexico and the US. NAFTA became adirty word during the primaries of both parties. Bill Clinton's wife,Hilary Clinton, opposed it. Obama opposed it. The Republican nominee,John McCain, still defended free trade, even though the RepublicanParty is more ambivalent towards it. While there is still someuncertainty over the outcome of the presidential election, the outcomefor the congressional elections is not; the Republicans will become adiminished minority in the Congress. The direction on free trade isclearly backwards.



I am not suggesting there would bedifferences between the two. Obama is a traditional liberal in favor ofmiddle and low income classes, while a Republican one would continuetax cuts that favor the rich. This is a traditional battle line betweenthe two parties. For the masses, an Obama administration is preferable.They have fared poorly in the past decade and are losers during rapidglobalization. The asset bubble postponed their hardship by allowingthem to borrow against rising home values and run up credit card debts.As the bubble bursts, the chicken is coming home to roost. At the sametime, gasoline price has tripled. If their mind is clear, they wouldn'tvote for the Republican candidate.



In a traditionaldemocracy, politics of economic interests boils down to two sides thatrepresent labor and capital. The competition boils down to tax andwelfare. Market competition allocates income in a certain way. It is anefficient outcome in some sense. But, skewered income distribution mayreinforce itself and lead to a vicious cycle. For example, childrenborn to poor families may not get proper education and will get lowincome when they grow up. Hence, income redistribution can improvedynamic efficiency. On the other hand, a prosperous society cannottolerate abject poverty for a significant share of the society. Hence,income redistribution to some extent is desirable for those who paytaxes.



The above standard case for incomeredistribution is often overwhelmed by the need for social justice. Inmany countries, probably most, rich people preserve and expand theirwealth by controlling the government policy, i.e., skewered incomedistribution is due to social injustice rather than market force.Hence, income redistribution through tax policy is quite justifiedeconomically and morally.



Thus, labor party shouldprevail in a democracy. But, ruling party usually becomes entrenchedand inefficient after being in power for a long time, changing to theother side can clean up the government. For example, the Labor Party inthe UK has been in power for too long. The UK voters are ready to driveit out of power and bring back the conservatives.



Thenon-economic issues are unusually important in the US politics. Socialvalues or cultural issues drive many voters, especially the energeticones. Abortion rights and gun ownership are the most potent ones.Immigration and race are also highly divisive. These 'value' votershave grouped with tax cutters in the Republicans in the past twodecades. As the 'value' voters are a small minority but are the mostmotivated, a Republican candidate must pass their tests or else. GeorgeW. Bush personifies what the Republican Party is. He is aborn-again-Christian, the most powerful religious movement in the US,and a businessman in favor of low taxes. John McCain is in favor of lowtaxes but was at odds with the 'value' voters on key value issues. Helost the contest against George Bush in 2000 for that reason and hasmethodically changed his positions to secure the support of the Party's'value' faction. He picked his vice presidential candidate for thatreason.



The presence of the ''value' voters gives theRepublican Party more chances to win than on economic issues alone.Most value investors are not economically well off. They tend to bewhite, live in small towns, poorly educated, own guns, and have manychildren. They don' have much in common with tax cutters who live inbig cities, own businesses and/or substantial financial assets.McCain's choice of Vice President, Sarah Palin, is in the 'value'category. The choice served to energize the 'value' voters for McCain.



Thealliance between the tax cutters and 'value' voters is not enough towin the election for McCain. They are still the minority and can winthrough their energy and passivity of the majority. The Democratsrepresent the majority. But the majorities are passive. Many don'tregister to vote. They think that their votes don't make a difference.The Republicans count on their passivity to win elections. But, thecurrent election is quite different.



Obama is black.It has motivated the black community that has the lowest votingtendency. Also, Obama has connected with youth who usually have lowturnout. Their increased participation will make a difference. Thepresidential elections in the past two decades were won or lost on thinmargins. Rising turnouts usually favor the Democrats. Obama's abilityto do that is a big plus.



Also, the economy isplummeting. A typical blue-collar worker makes under $2,000 after taxper month. He used to spend $120 per month on gasoline but now spends$500. His food bill was $600 per month but has risen to $900. On theother hand, healthcare insurance is $400 per month. His wage is notrising. Even if this person keeps his job, he is under enormouspressure to make ends meet. He is not in a position to support afamily. Even though many of such voters like Hilary Clinton better, itis too much for them to vote for McCain who favors tax cuts for therich.



An energetic minority like the Republican Partycan control a country when the economy is in reasonable shape and themajority is not motivated to act. Today's situation is clearlydifferent. The Republican Party has brought the US to its ruinoussituation on both foreign policy and economy today. If the Americanvoters choose the Republican Party again, they clearly deserve what'shappening to them.



Despite the terrible record that theRepublican Party is running on, the polls show a tight race betweenObama and McCain. Obama's race and inexperience are often quoted asfactors. Certainly, the election outcome is still open. The Democratsare likely to win the Congress big, which may give voters a reason togive the Whitehouse to the Republicans to prevent power concentration.However, a split government will lead to political gridlock, which isvery bad for solving big problems. The current crisis requires aunified government. I suspect that the election outcome would not be asclose as the polls indicate.



Politically, Barak Obamais a miracle. He announced his candidacy on February 10, 2007. At thetime, he had been a senator for two years and was a state legislator, apart time job for seven years before. His executive experience islimited to his years as a community organizer in poor blackneighborhoods in Chicago. His inexperience made his candidacyimprobable. Seventeen months later, he has won the Democratic Party'snomination and is poised to win the general election for the presidencyin November.



Obama belongs to the African Americanminority. No major country has voluntarily picked a leader from aminority in modern history. Combining his minority status with hisinexperience, someone like him wouldn't have a chance in any othercountry. His rise reflects the dynamism of the US's political systemand the risk taking appetite of its voters. Indeed, when a country isin so much trouble, it doesn't make sense to pick anyone from theestablishment. Someone out of the establishment is by definitioninexperienced. In a well functioning system, a leader gives directions,doesn't engage in detailed executions. The risk with someone like Obamais actually a lot less than it appears.



Regardless ofwho wins, it would be extremely difficult to turn the economy around.The US has been living in a debt bubble. There are many reasons forthat. Greenspan was probably most responsible. He leaned towards easingduring his 18 year reign at the Fed, didn't rigorously regulatederivatives, and tolerated sub prime surge. We can blame greed. WallStreet concocted complex products with assumed, not real reduction inrisk and sold them to credulous but equally greedy investors. But, thebubble-conducive environment wouldn't necessarily lead to a bubbleunless American households were eager to borrow. Why did they borrowand spend beyond their means for so many years?



Theroot cause was that many, possibly the majority, of Americans tried todefend their living standard during the rapid pace of globalizationthat decreased their earnings power. Economic theory says free trade isalmost always beneficial for every economy, i.e., making pie bigger forevery participating economy. However, how the pie divides within aneconomy changes with trade. There are absolute losers in free trade.The theory says that redistribution in each economy would make everyonebetter off. This is where politics comes in. How successful thepolitical process goes depends on how quickly the pie expands and ifthe system is flexible and responsive. America's economy hasn't beenexpanding fast, but income distribution has. The Gini coefficient forincome distribution rose to 0.469 in 2005 from 0.428 in 1990. It hasprobably ticked up significantly. The sharp rise in the Ginicoefficient suggests declining living standard for a significant shareof the population.



Rapid inflation of healthcare costhas played a more important role than globalization in raisinginequality. The US's healthcare cost has surpassed 16% of GDP or twiceas high as one quarter century ago. The high cost of healthcare imposesharsher burden on low income than high income groups as low incomehouseholds pay bigger share of their income for healthcare. This is thereason that 15% of the US's population doesn't have insurance, becausethey can't afford it. Indeed, adjusting for healthcare cost, the medianincome for the US's middle class has been stagnant in real terms forthe past decade.



The headwinds from globalization andhealthcare made it difficult for an average American family to raiseliving standard from income growth. But, Americans still believed inever rising living standard. Debts borrowed against overvaluedproperties served to support the fiction that everyone was better off.Indeed, the bubble boosted economic growth rate and made rising livingstandard more real. The giveaway was the large trade deficit and risingforeign debt. This is where financial 'innovations' came in; theyunderstated risk through diversification and/or dynamic hedging anddecreased equity capital for debt funding. Of course, all things arecorrelated in a crisis and diversification does add value, and dynamichedging stops working exactly when you need it.



Inaddition to the financial crisis and the healthcare crisis, a socialsecurity crisis is looming. The baby boomers are retiring. The socialsecurity system is a pay-as-you-go system, i.e., one's contributionshave not been saved but spent on someone else. The system generates'surplus', when more people are joining the labor force than retiring.The reverse is also true. The shortfall of the system is estimatedbetween 2-3 times GDP. The US government may be technically bankrupt.The next government has to do something about it.



Whatare Obama and McCain are offering for the crushing problems likefinancial crisis, skyrocketing healthcare cost, and bursting socialsecurity system? Not a lot. The few that they offer don't solve but maycompound the problems. Both have supported financial bailouts. The Bushadministration has just taken over Fannie Mae and Freddie Mac tostabilize the mortgage market and to probably boost McCain's electionchance. But the government said it wouldn't cost taxpayers. They arestill waiting for a miracle. Many financial institutions are kept aliveby the Fed. They threaten to become zombies like in Japan during the1990s.



On healthcare care, for example, every candidateis trying to widen the insurance coverage with government spending, butnot cutting cost. While widening coverage improves social justice, itwill compound the healthcare crisis in the coming years. The US'shealthcare cost to GDP ratio is increasing by 0.25% per annum. Theproposed programs will accelerate the trend. With healthcare costescalating like that, the US economy cannot regain dynamism.



Onsocial security, the Republicans want to privatize, i.e., suggesting toretirees to gamble in the stock market to make up for the shortfall.The Democrats want to tax the high income groups to boost theircontributions. Neither is talking about cutting benefits, which is theonly solution. The age to qualify, for example, has to be raised fromthe current 63. Otherwise, the government is burst.



TheUS economy is facing the biggest crisis since the Great Depression. Itrequires considerable sacrifice to solve. But politicians are talkingthe other way and promise more goodies. What gives? The dollar.Printing money spreads the pain for all dollar holders, and many areforeigners. This is the last tool that the US has to not pay for thefull cost. Eventually, foreigners will realize this and run. This gamestops working when the dollar free-falls.



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