The de facto nationalization of the global financial system
(posted by jackson)
I’ll post a few links to posts by the economists Brad Delong and Brad Sester. First, Brad Delong quotes David Leonhardt, who is arguing that the official inflation rate (in the U.S.) is still over-stating how much inflation is actually occuring (that is, Leonhardt is arguing that there is less inflation than the government reports):
It helps to go back…. In 2003, a pound of hamburger cost all of $2.20. More than two decades earlier, in 1980, it cost $1.86, which means that the nominal price of burger meat rose only 18 percent over a period in which the nominal hourly pay of the typical American worker rose 150 percent. Similar stories can be told about eggs, bananas, bread and frozen orange juice. Food was getting cheaper…. During the 1980s and 1990s, though, did you ever stop and marvel at what a small share of your paycheck you were spending at the supermarket? I didn’t. I also didn’t really notice that gas cost less in the late 1990s than it had in the 1980s…. Price increases are simply more noticeable — more salient, as psychologists would say — than price decreases….
The price of major appliances has been flat over the last year. Furniture is 1 percent less expensive. A decade ago, a basic four-door Toyota Corolla LE cost $16,018, according to the company. The 2009 basic model costs $16,650, and it’s a safer, more powerful, more fuel-efficient car than its predecessor….
Brad Sester looks at the rapid growth of assets that are owned by foreign governments. He calls this “The de facto nationalization of the global financial system“:
This isn’t just a product of high oil prices. In 1980, oil was quite high but emerging market official asset growth was about 0.5% of global GDP. It is now more like 2.5% of global GDP.
The main reason for the difference between the current era of high oil prices and 1980?
Asia, which imports oil, added to its official assets at an even faster pace than the oil exporting economies in 2007. That may not change in 2008, though the oil exporters are sure to give Asian oil importers a run for the title.
China’s foreign asset growth seems to have picked up to an absurd $200b a quarter pace. We still don’t really know, as China hasn’t indicated exactly how much foreign exchange was handed over to the CIC in the first quarter. And who knows what will happen in q2. China’s trade surplus usually builds over the course of the year, but rising oil may start to bite. But for all the uncertainty, China’s official asset growth will still be strong.
And if oil prices average $110b a barrel this quarter – and if the per barrel price needed to cover the oil-exporters import bill is about $50 a barrel – the external surplus of the oil exporters in the second quarter should be above $200b. If oil stays at its current level for the summer, that surplus will only get bigger. And most of that surplus goes to the state in one way or another. Some countries use their central bank. Russia’s reserves were up by over $25b in April alone, Saudi non-reserve foreign assets increased by around $40b in the first quarter; others use a sovereign fund.
Barring a major change, the Gulf and China could easily combine to add close to a trillion dollars to their official assets this year.
Nothing goes up forever. At some point, the pace of increase in official asset growth has to slow. But as of now, there isn’t much sign of a real slowdown.
Felix claimed not so long ago that the US was too big to fail. Certainly many emerging markets are doing their best to finance the US through its current troubles, and thus keep up demand for their oil and goods. But a part of me wonders if the rise in inflation in the Gulf and China and the difficulties both are facing trying to sterilize the rapid growth in the foreign assets is an indicator that there is a small risk that the US also might end up being a bit too large for the emerging world to save.
(We should pause for a moment to consider how completely obsolete the word “nationalization” is in this context - once upon a time the identity of the “nation” was never in doubt - it was always the same that controlled the land that the asset was sitting on. No longer.)
Brad Sester also takes a look at the degree to which China’s foreign investments are controlled by political factors:
The fact that the equivalent of China’s cabinet — though I suspect the inner core of the State Council is a more powerful group than a modern US cabinet — seems to be the key decision-making body is bound to shape the world’s perceptions of China’s outward investment. If many of the members of the United States’ National Security Council meetings also decided which foreign firms the US should buy, I would suspect that US investment abroad would be viewed with rather more suspicion. To date, China has not set up the institutions that manage its foreign investment in ways that insulate their decision-making from China’s top political leadership.
The extensive involvement of China’s top leaders reflects the fact that in many ways China are just starting to invest in foreign equities, so each big investment effectively sets a new precedent and therefore makes policy. It also may be a consequence of the decision to spread the management of China’s foreign exchange among different state institutions (SAFE, the CIC, the big state banks). That decision seems to have guaranteed that disputes over who gets to buy will go to the top level of China’s government to resolve.
Tags: china, chinese foreign investment, foreign investment, inflation, nationalization
May 12th, 2008 at 8:48 am
I’m going to sound like a broken record, but…
Delong’s analysis is a classic example of the broken window fallacy. We can see that some (funny how he doesn’t pick housing, education, or health care, isn’t it?) goods have increased *only* 18% in nominal terms over a time period. But what we can’t see is how much they would have decreased over that time period absent Fed intervention.
For example, what if that $25 gramps gave you in 1980 and you saved, was enough to be a good down payment on a house now?
Is that possible? Probably not, but it illustrates the fundamental flaw in Delong’s analysis. We just don’t know what true depreciation would have done for the savers from the middle class and below. Saying that inflation isn’t that bad is akin to saying that war stimulates the economy - it fails to recognize that absent the destruction, the inputs would have been employed to satisfy other wants and needs.
There are other, more technical flaws (most related to the distortions created by shifting the benefits of saving from the many savers to the few politically connected bankers), but that’s the basic, obvious one that Delong and a few others who have made the same argument (Cafe Hayek) consistently ignore.
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