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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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谢国忠:美联储印钞的乐观反应  

2009-04-01 01:26:11|  分类: 言论 |  标签: |举报 |字号 订阅

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美联储印钞的乐观反应


Optimal response to the Fed printing dollars

(点击查看译文)

Andy Xie/March 29, 2009


TheFed announced last week that it would buy $1.15 trillion of treasuries,commercial papers and mortgage papers. The Fed has been already doingall the things in this new program. Its balance sheet has doubled fromthe pre-crisis level of about $900 billion. This program could tripleits balance sheet from the pre-crisis level. The Fed has promised tocontract its balance as soon as the economy is strong enough orinflation shows up. But, it is unlikely that the expansion could all bereversed. If at the end the Fed’s balance sheet merely doubles ratherthan triples, the dollar’s value would still halve, ceteris paribus.

However,if other central banks print money to keep their currencies fromappreciating against the dollar, a likely scenario, other currencieswould experience downward pressure too. The equilibrium for the globalcurrency market could be rotating devaluation, which would anchorinflation in all major economies. I still think that the central pathfor the global economy is stagflation. Fiscal stimulus and inflationmay trigger a bounce in the global economy in the second half of 2009.However, it is a head fake. The global economy could have a second dipin 2010 when inflation emerges to blunt the effectiveness of monetarystimulus. In particular, bond yields could surge around the world. Thereal bottom for asset prices may be in 2010.

After the Fedannouncement the dollar made a record weekly drop, treasury yield andmortgage interest rate dropped sharply. The market responses were whatthe Fed intended. As long as the market think that the Fed’s monetaryexpansion is bound by its announcement, i.e., the dilution of thedollar is limited, market can price in the new value of the dollar.Other asset prices move according to what the Fed does with the moneyfrom diluting the dollar.

The motivation for the Fed’s policyis to stabilize property price. The Fed has so far focused onstabilizing the financial system through guarantees on the assets heldby and loans to troubled financial institutions. Even though it hasachieved some success in that regard, it has had no meaningful benefitfor the economy. The US economy continues to deteriorate as reflectedin surging unemployment. It has concluded that it must try to stopproperty price from falling to stabilize the economy. The US householdproperty value has contracted by $4 trillion or 20% from the peak in2006. The wealth reduction from the stock market decline is much biggerat $6 trillion. But, as massive amount of financial products are backedby property value, the multiplier effect from the property pricedecline is at the center of economic and financial turmoil.

TheUS Treasury released its plan for purchasing $1 trillion of toxicassets from the troubled banks. Under the plan a private investor(e.g., PIMCO, Blackrock, or hedge funds) could invest one dollar ofequity capital in a special purpose vehicle to buying toxic assets. TheUS government will co-invest a dollar of equity. The vehicle could thenborrow $12 under the government guarantee, i.e., borrowing at zerointerest rate for short-term debt and 2.75% for ten year debt. Thesubsidy for the program essentially comes from the debt guarantee. Thedebt bears little difference from equity in terms of taking downsiderisk but gets no upside. The private investor gets to magnify thereturns six times with government debt guarantee. This is why privateinvestors are interested in the program.

But, this program isnot different from what the former Treasury Secretary Hank Paulsonproposed when the TARP was set up. It didn’t fly because the marketprices for toxic assets were too low for banks to survive. Indeed, atthe current market prices, major big banks are bankrupt several timesover. The hope for the new program is the incentive from the 6 timeleverage for private investment. It might motivate private investors tobid up the prices for toxic assets that will allow banks to survive. Iam not sure that it will be so. I am afraid that this program isincomplete. If the prices for toxic assets don’t go up, the USgovernment may have to come back to nationalization as the way out.

Bankbailout program is about who would pay for the cost and how soon thebanking system can recover to provide normal services. The former is anequity issue and is highly political. Popular sentiment wants bankshareholders, bondholders, and managers to pay before taxpayers pitchin. Government leans towards preserving the capability of the bankingsystem. The US government is using debt guarantee to hide its subsidyfor the people who created the crisis. We will see if American peoplewould tolerate that. The later is about to minimize the collateraldamage to the economy from a dysfunctional bank. From that angle,government should compromise to resuscitate the banking system as soonas possible, which is a justification for subsidizing crooks andcriminals that created the mess.

The stock market rally we areseeing is a bear market rally. As I wrote at the beginning of 2009, acredible bank rescue plan would start a bear market rally. It won’tlast. The reduction of leverage after a credit bubble bursts takes along time, which prevents a vigorous economic recovery. The currentbear market that began in the fall of 2007 would last at least threeyears. It could be longer than five years. Even after leverage isnormalized, the global economy still needs to find a new growth model.We are not seeing structural reforms that will lead to a new growthmodel.

I have argued that, in the aftermath of aproperty-cum-credit bubble bursting, there are three possible outcomes:(1) bankruptcy, (2) inflation, and (3) government bailout. The formerforces lenders to accept losses beyond what borrowers can pay. Thesecond allows borrowers to retain assets by inflating away their debts.The US accepted the first scenario in the 1930s. Germany did the secondin the 1920s. Japan did the third in the 1990s. It kept interest rateat zero to decrease debtors’ carrying cost to zero and allowed them topay down debts gradually over a decade. During the meantime, thegovernment ran massive fiscal deficits to give debtors a chance to makemoney. It was a gradual assumption of private sector debt by the publicsector. Japan’s government could have just assumed half of the privatesector debt at the beginning of the 1990s. The country would have beenfar better off than going through the kabuki of ‘fiscal stimulus’ toslowly take over private debt.

The dominant force after a bubblebursts is normalization. For example, in a normal economy, say, incomeis 100, property price is 100, and debt is 60. During aproperty-cum-debt bubble, property price rises to 200 and debt 150, butincome remains at 100. When the bubble bursts, property price wants tofall to 100. But, the notional value of debt can’t decline. In thebankruptcy scenario, the property owner goes bankrupt. The creditorrepossesses the property, sells it for 100, and books loss of 50. Inthe inflation scenario, income rises to 200. The property owner retainsthe property. The credit gets 150 back in full. But, its real valuedeclines by 50%. The creditor loses 75 in real terms in the inflationscenario. In the third scenario, the creditor pretends that the debtorhasn’t gone bankrupt, stretches the repayment, and foregoes interest.Overtime the creditor gets 150 back. However, as money in future isworth less than money now, the creditor suffers losses from thediscount factor. Indeed, one can prove that the creditor gets maximum100 in this scenario.

The dynamic of a bubble burstingcomplicates the process. Either property price declining or inflationwould have collateral damage. The most important is risingunemployment, which is net loss rather than redistribution, i.e., idleworkers could have produced something. Policymakers like the Fed areusually motivated by the desire to minimize the collateral damage. Idon’t think that the Fed has a clear plan. It is responding topressure. As it sees the falling property price as enemy # 1, it istrying to stop it. Hence, it wants to print money to purchase mortgageassets, which has the effect to depress mortgage interest rate. Asmortgage interest rate falls, it decreases the bankruptcy risk of theborrowers and, hence, decreases distressed sales. Of course, lowermortgage rate increases property demand. Through curtailing supply andboosting demand, the Fed wants to stabilize the property price and theeconomy.

Let’s assume the Fed succeeds. What would the worldlook like? The US’s property price has declined by about half on theway to normalization. The Fed policy could replace further decline withinflation. Hence, relative to a normal path, the US economy would have20-25% more inflation. Ceteris paribus, the dollar would drop by 20-25%from here. The dollar dropped by roughly 5% during the week of theFed’s announcement. I think the dollar’s weakness story has way to go.

But,we should not look at the US side alone. Other economies areexperiencing similar problems. For example, the UK’s property was 200%overvalued at the peak compared to 100% for the US’s property. It isexperiencing even worse downward pressure. It is a matter of time thatthe Bank of England would be forced to do the same as the Fed is doingnow and on a bigger scale. Hence, the dollar may drop against the poundsterling initially but may rise when the Bank of England imitates theFed.

The Bank of Japan may need to monetize for differentreasons. Japan didn’t have property bubble like others. But, itseconomy benefited from the credit bubble. For example, cheap creditexaggerated car demand. As credit cost rises, consumers will respond bychanging car less frequently. Hence, the total car demand would dropsharply, possibly by half. Half of the auto factories in the world mayshut. The US government is moving to support the Detroit Three, whichwould put pressure on the Japanese automakers to shut factories. TheBank of Japan is responding to the terrible situations facing itsindustries by lending them money, which is printing money. We could seethe Fed and the BoJ dueling it out by supporting their industries tosee who would blink first and shut factories.

The EuropeanCentral Bank is not immune to printing money. Among the three centralbanks the ECB has been most cautious in terms of loosening monetarypolicy. But, its banking system has lost huge amounts of money. Itseconomy depends on exports. If euro is strong, its industrial sectorwould suffer horribly and its banking system will hemorrhage more onrising bad debts. The ECB may be forced into printing money to supportits banking system and industries.

As the Fed embarks on theunprecedented policy of printing money to bail out debtors, the bestoutcome for the world is stagflation. A worse outcome is that marketspanic over endless supply of dollars and sells dollars at any price. Itwould cause a dollar collapse like what happened to ruble in 1998. Theoutcome is hyperinflation. The resulting chaos would plunge the globaleconomy into turmoil.

How should China react to the Fed’spolicy? It is not possible for China to pressure the Fed to change itspolicy to protect China’s foreign exchange reserves. The Fed doeswhat’s best for the US. China has to do what’s best for China. It ispointless to hope the US to do what’s in China’s best interest. As Ihave argued before, as Chinese currency is linked to the US, China’sforeign exchange reserves must be kept mostly in dollar assets. Theonly alternative to treasuries is the stock market. Stocks are betterthan bonds during a weak dollar environment. They have tripleprotection against inflation and weak dollar.

First, half ofS&P 500 earnings are from abroad. If the dollar goes down, theearnings in dollar terms would rise. Further, the US companies gaincompetitiveness from the weak dollar and their stocks may become morevaluable. Second, if the Fed succeeds in improving the US economy,improving domestic demand would boost corporate earnings. Third,companies have assets like brand and technology that would appreciateduring inflation.

The best way to get into the stock market isto buy S&P 500 index. It is the only asset with liquiditycomparable to the treasury. It has performed better than 90% of thefund managers and would certainly do better than Chinese governmentofficials picking stocks. It avoids the political controversy ofChinese government trying to control American companies.

I amnot advocating Chinese central bank to sell treasuries now and buystocks. The first step is to make the treasury portfolio as close tocash as possible by shrinking duration, i.e., buying shorter andshorter maturity treasuries. The US stock market will make more lows inthe next twenty months. The book value of S&P 500 is 517. Itscurrent price is 823 or 1.6 times book. The historical average price ofS&P 500 is 2 times book value. The current price is 20% discountagainst the historical average and is insufficient for the currentenvironment. During the last structural bear market between 1972-82 itaveraged 1.3 times book value. On price earnings ratio the currentprice is not low either. The earnings for S&P 500 in 2009 arelikely to be 50. The current PE ratio is 15.4. This is high by bearmarket standard. It should be 11-12. The downside for the US stockmarket is considerable. I think there would be better entry points forChina’s foreign exchange reserves.

In addition to protecting thevalue of existing foreign exchange reserves, China should try to stopincreasing foreign exchange reserves. The only way is to boost domesticdemand to cut trade surplus. Even though China’s exports are decliningat about 20%, imports are declining more. Trade surplus may not shrinkat all. It would force China to buy more dollar assets, as China’scurrency is linked to the dollar. I think that there are two policiesavailable to cut trade surplus quickly.

First, China couldboost fiscal deficit to Rmb 1.5 from 1 trillion for fiscal 2009. Theextra fiscal stimulus should be on the household sector rather thaninvestment. Cutting taxes, for example, would boost household spendingpower. The VAT tax, for example, could be cut significantly. It is anexcise tax and is regressive, i.e., taxing the poor more than the richproportionally.

China also should cut the top marginal incometax rate from 40% to 25%-the same as corporate income tax rate. Thecurrent high tax rate is bad for revenue collection. The personalincome tax revenue is too small in the overall fiscal revenue. The highrate has incentivized tax dodging. Also, most entrepreneurs book theirpersonal spending as company expense to avoid taxes. Making corporateand income tax rates the same would obviate this incentive. Taxing therich doesn’t always mean protecting the poor. High tax rates benefitthe poor if the money is collected.

Second, the government candistribute the shares that it holds in state-owned enterprises to thepopulation to boost consumption. My rough calculation is that such aprogram would boost consumption by Rmb 500 billion. As the economyimproves on rising consumption, the share prices would rise and therewould be a further increase of Rmb 500 billion in consumption.

Cuttingtaxes and distribute SoE shares among Chinese population would roughlyeliminate China’s trade surplus, obviating the need to buy dollarassets. It will lay the foundation for China to float its currency andbecome an independent force in the global economy.

The USgovernment is trying to do what’s best for its economy. China must dothe same. Wishful thinking, hoping the US to do what’s best for China,is daydreaming. It is not about what’s fair. In a modern world everyonemust optimize for itself.




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