Billmon: Chicken & Egg II – Moon of Alabama

May 6, 2005

Billmon: Chicken & Egg II

I think there is a global “glut” of savings, one which has made it possible for the United States to finance its gluttonous appetites at interest rates I would never have believed possible when I first started thinking about this topic more than a decade ago.

However, I agree with Roubini that the Fed is whistling past an economic graveyard if it thinks the savings glut will allow America to continue sucking up 70-80% of all global capital flows for many years to come. The financial conditions that made that possible are on artificial life support.

Part I; Part I – Discussion

Posted by on May 6, 2005 at 20:15 UTC | Permalink

Comments

Please talk about delta-M3. I believe this is major part of what you are trying to explore.

Posted by: shah8 | May 6 2005 20:36 utc | 1

Oil groups ‘under invest by 20%’

Posted by: Jérôme | May 6 2005 21:01 utc | 2

And why is so much capital flowing to the world’s richest nation, instead of remaining in the developing world, where it could presumably earn a much higher rate of return?

While every individual capitalist would like to restrict the consumption of his ‘own’ workers, the capitalist class as a whole must widen the market for consumer goods, and at the same time ensure the valorization of capital. It can partially bridge this contradiction in number of ways. Firstly, it can render the production of consumer goods increasingly `indirect’, so that a growing portion of the total product consists of means of production rather than consumer goods Secondly, it can sell a substantial part of the consumer goods produced to social classes other than the proletariat (peasants and artisans at home and abroad), or shift purchasing power to the disadvantage of simple commodity producers or other capitalists (including ‘foreign’ capitalists, by a redivision of the world market). Thirdly, it can sell an increasing portion of consumer goods on credit rather than in exchange for income (increase in private indebtedness). Finally, it can ensure that the growth of mass consumption (including that of its ‘own’ workers) is proportionately less than that of total commodity values, so that the production of relative surplus-value increases.–Mandel

Could the answer be as simple as 2)? U.S. absorbing savings because China and others realize greater surplus value by depressing wage-rates?
Man oh man, how depressing.

Posted by: slothrop | May 6 2005 21:03 utc | 3

My question is, what is going on with global capital flows, balances and opportunities that would make private equity so difficult to disperse?
Buffet and Carlyle both reported huge holdings in cash. The loose money supply from the Fed has created a situation where there is more money chasing investments than available investments. With equity markets overvalued and real estate at the peak of a boom and bond markets in disarray it makes one wonder what the hell to do with ones money. The professionals are not even sure.
There certainly are gross inequities and there is a lot of money chasing few imvestments. I often wonder myself why this money should not be invested in Africa, but I don’t think US investors can think creatively enough to put the money to good use. Equities in emerging markets will certainly suffer if the US stock market suffers. However, there certainly is probably a lot of room for investment in venture capital, acquisition, and business loans.

Posted by: Bubb Rubb | May 6 2005 23:47 utc | 4

Sounds to me like it’s time for a general major power war to slurp up all of that excess money loosed on the world’s economy by the major central banks. What else can burn money quite as fast while still allowing for profit by the capital’s owners?

Posted by: PrahaPartizan | May 7 2005 0:27 utc | 5

Unfortunately, that is the common way to solve the equation.

Posted by: citizen | May 7 2005 0:56 utc | 6

“With equity markets overvalued and real estate at the peak of a boom and bond markets in disarray it makes one wonder what the hell to do with ones money.”
The people w/this problem are the ones who’ve fired tens if not hundred of thousands of workers & shipped their jobs to slave wage countries, concentrating all the money that should be paid to american workers to pay their mortgages in the hands of a very few. The solution is obvious. You’re just mystifying it.

Posted by: jj | May 7 2005 4:49 utc | 7

And why is so much capital flowing to the world’s richest nation, instead of remaining in the developing world, where it could presumably earn a much higher rate of return?
I put a link to The Guardian’s obit for him on the current open thread already, but I think it’s more a propos here. Andre Gunder Frank, who died at the end of April, gave a lifetime of thought this question. He published some online essays here, which site also gives info about his more substantial works, including ReOrient: the global economy in the Asian age.

Posted by: Dismal Science | May 7 2005 12:42 utc | 8

There’s going to be developing jobs in “developing” countries, it’s just that the US in particular isn’t investing in technologies of the future.
On a side note, can someone explain to me how interest-only loans are a good thing? How is it any different than leasing money or renting a place?
And please, don’t give me that “It makes sense because we plan on selling in X years.”-that number X seems to be very similar for a LOT of people. Can you say GLUT?
Maybe I’m just bitter because being a late boomer (True GenX) me and my family always get screwed in any money trend….sigh….

Posted by: doug r | May 7 2005 16:33 utc | 9

China: Do not expect 40% rise in yuan value
Beijing May 7 — China said on Friday upward pressure on its rigid yuan currency was not so great and urged speculators betting on an imminent revaluation to be patient.
Vice Finance Minister Li Yong told participants at the annual meeting of the Asian Development Bank (ADB) in Istanbul that he believed the pressure for the currency to appreciate stemmed from domestic, not external, factors.
“I don’t feel the upward pressure is that strong. I feel the pressure is not from the outside but from domestic needs,” he said.
Li reiterated there was no timeframe for floating the yuan and said establishing market mechanisms and pushing financial sector reform were pre-requisites for a change in the currency regime….

Posted by: Nugget | May 7 2005 17:50 utc | 10

Doug, I don’t get those loans, either. If the house depreciates, even a little, you’re instantly in a position where you owe the bank more than the house is worth. When the real estate bubble pops (and the very fact that it’s now being held aloft by airy confections like interest-only loans means that the last moments are upon us) we’re going to see a lot of these poor suckers just walking away from homes that only increase their debt load every month they stay in them — and a lot of banks swamped with foreclosures they can’t give away.
What are ANY of these people thinking?
OTOH, in this weird historical moment, people who are unloading debt, piling up the cash, and sitting tight in rented digs will be well-positioned to pick up their dream homes at discount prices in another year or three.

Posted by: Mrs. Robinson | May 7 2005 18:12 utc | 11

of the subject but not really. i would LOVE to understand more about economics. can anyone suggest a “for dummies” type book that will help me? i understand a few things here and there, but i think grasping the basics would be the best way to start.

Posted by: charmicarmicat | May 7 2005 18:44 utc | 12

Andre Gunder Frank, who died at the end of April, gave a lifetime of thought this question. He published some online essays here, which site also gives info about his more substantial works, including ReOrient: the global economy in the Asian age.
Posted by: Dismal Science | May 7, 2005 08:42 AM | #
I have certainly read Frank and his disciples, like Wallerstein and certainly believe that Frank, like Marx, provides an excellent analysis and critique of the world system. The problem however is being short on solutions. And the reality is that maybe the answer and solution are one and the same and that is a result that will be painful for everyone.
If the house depreciates, even a little, you’re instantly in a position where you owe the bank more than the house is worth. When the real estate bubble pops (and the very fact that it’s now being held aloft by airy confections like interest-only loans means that the last moments are upon us) we’re going to see a lot of these poor suckers just walking away from homes that only increase their debt load every month they stay in them — and a lot of banks swamped with foreclosures they can’t give away.
These loans will turn out to be bad deal not just if there is depreciation, but also if the housing market stagnates. If for those years that you are paying only interest and the price of the home doesn’t increase and increases at a rate lower than the interest rate on the loan, people are going to be in a lot of trouble. I can’t believe that so many people expect double-digit growth indefinitely into the future. It is a purely speculative market and worse, it is overspeculated by fools. There will be pain, trust me.

Posted by: Bubb Rubb | May 7 2005 21:15 utc | 13

Clearly this is the best time to build infrastructure to start a new industry. Labor is cheap. Materials are extremely cheap when bought outside the retail chain. Communications are ubiquitous. Monolopolists are fat and stupid.
Unfortuneatly, the main investment vehicle right now is Uncle Sam, and he’s only buying bombs. Not just any bombs mind you, but the most expensively priced bombs available, especially those that are the quickest to make under the least amount of testing. They don’t
have to actually work, as demonstrated by the endless cover up of the completely failed missle defence program. They just have to soak up money. Otherwise that money would be flowing back into private investment firms, who would certainly be continuing their attempts to dethrone the many fat dumb American monoplies. Insurance, areospace, broadcast, recording, automotive – oops even central planning can’t save GM.
We hear Honda would like to offer GM a helping hand to stay in business. Too bad Honda doesn’t have an “engine suite” like Microsoft’s Office suite that can keep the MacIntosh, oh we mean GM alive. Maybe if Honda hired enough “bulldog” style gay hookers they could convince the GM board to let Honda run the auto factories remotely for them. And if Honda needs a map showing how that would work, we hear that there are some recently unemployed AIPACers that would draw it up clearly for them, for the right price. 😉 “Try the veal. I’m here till Thursday.”
We have literally shifted from the dot com era, to the dot bomb era, where dot com “CEO wisdom” is being applied by equally arrogant, corrupt, self-serving “Government bureaucrats” to the military and its comsumables. This is true from decision making to book keeping.
Buffet is sitting on his money because he knows the next round of collapse, will permit lots of “buying” opprotunities. Why start new industries, in the face of an impending military/housing bubble explosion? The irony is Team Bush isn’t even planning for slow devaluation, they want it fast and hard, but then we hear thats how they like their recreational activities… -are you taking notes yet Honda?

Posted by: patience | May 7 2005 21:22 utc | 14

charmicarmicat
Like you, I’m a dipshit when it comes to eonomics. I’d suggest reading a econ 101 college texts to see what a demand curve is, and the difference between nominal and real interest. I’d suggest something like CARL SHAPIRO & HAL R. VARIAN, INFORMATION RULES: A STRATEGIC GUIDE TO THE NETWORK ECONOMY (1999), which demonstrates market failures. Lastly, some will laugh, but Keynes’ General Theory is an excellent analysis of global economy. It’s a classic for a reason. Very readable. Well, finally, please read the first 90 pages of Capital.

Posted by: slothrop | May 7 2005 21:39 utc | 15

charmicarmicat
The Alchemy of Finance by George Soros.
It could be a tough read though. You really get to wrap your noodle around things that you’re not going to find in any text book.

Posted by: dt | May 8 2005 17:25 utc | 16

The savings glut is a blind alley. What we have is a liquidity glut which has been fueled by an out of control credit system. Banks are no longer the prime providers of credit, it is Wall Street and the GSE’s.
This alt view is best covered by one Doug Noland in his weekly column on the Prudent Bear website.
His guru is Hyman Minsky, a minor but perhaps giant economist.
Six years of output is here
http://www.prudentbear.com/archive_home_com.asp?category=18
Where to begin? It’s hard to say. Always skip the first half of so discussing the weeks market moves and news and find the discussion portion labled under the same name as the header.
Is he a cassandra, a Chicken Little? Perhaps. However this path of analysis demands study. Ignore it at your own risk.

Posted by: Jorma | May 9 2005 2:22 utc | 17

Lastly, some will laugh, but Keynes’ General Theory is an excellent analysis of global economy. It’s a classic for a reason. Very readable.
Posted by: slothrop | May 7, 2005 05:39 PM | #
I have been thinking about this for a while and think that in particular, Keynes’ critique of rentier capitalism is particularly precient for today, especially related to copyright and intellectual property. With IP becoming the new economic rent (see Pharma, RIAA and MPAA among others), combined with the end of the estate tax and we have all of the makings for a new era of economic stagnation with only the super-rich, with no incentive to invest beyond collecting their economic rents and the superpoor, forced by government to pay those rents.

Posted by: Bubb Rubb | May 9 2005 5:20 utc | 18

Maybe I’m simple minded, but it seems that China and the other dollar importing countries are just exporting unemployment. If they had sufficient internal demand, then it would not make sense to send us real goods in return for pieces of paper. If they ever realize that they can increase internal demand by increasing wages, then we will be in trouble. Until then we can live high on the hog. Then we will be forced to go back to making things instead of writing blogs. The Chinese leaders are not stupid, they are trying to maintaining the status quo by suppressing internal discontent by creating jobs. Idle hands are the devil’s workshop to quote a well worn phrase. It is not in their interest to create the too much internal prosperity. That might lead to their people to want other things like democratic elections. The others like the leaders of Japan just want to maintain market share. They can maintain control without risking a change in government if unemployment isn’t too high. Ultimately, we will do what we have always done, devalue the dollar and leave them holding a bag of nearly worthless securities and that is what Washington is in the process of doing. For the time being we are following the advice of that sage of Texas, “Borrow enough from someone and you have a partner.” (I think he ended up in jail when the illusion broke down). Moral, greed is good, just don’t be too greedy. Alternative moral, don’t think too much, it gives you a headache.

Posted by: Ben | May 12 2005 18:25 utc | 19

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