Showing posts with label monetary policy. Show all posts
Showing posts with label monetary policy. Show all posts
Tuesday, March 1, 2011
On the Danger to the United States of Living off Government Debt: The Case of the Dollar as World Reserve in 2010
0 comments Posted by Find Insurance Online at 12:11 PMGiven the $13 tillion amassed in US Treasury debt plus all the debt amassed by the American states, the US dollar was losing out in percentage terms to other currencies as the global reserve currency in 2010. To be sure, in absolute terms, there were still more dollars being held abroad than twenty or thirty years ago, but as a report from Emma Lawson of Morgan Stanley shows, other currencies were taking on more of a relative presence.
Lawson believed that ”over time we anticipate that reserve managers may reduce their holdings further.” She is looking at the significance of small percent changes over a short time—and this I see as perhaps susceptable to overblowing small trends. For example, she found that central banks had dropped their allocation to U.S. dollars by nearly a full percentage point to 57.3% from 58.1%, and calls this “unexpected given the global environment.” But was such a change, relative to those shown in the chart, really significant? She argued that other dollars - the kind that come from Australia and Canada - had been benefiting from skiddishness on the dollar. The allocation to those currencies, which fall under “other” in the data, rose by a full percentage point to 8.5%, accounting almost exactly for the drop in the U.S. dollar allocation. She was undoubtedly assuming that the trend would continue, but a look at the chart can demonstrate that even the dramatic changes in 2002 had not continued at such a rate (e.g., for the euro and the US dollar).
Even so, Treasury’s huge debt could not but undermine the US dollar over the long term. This point ought not to be minimized or ignored under the fiscal pressure to push the US economy out of recession. Even if the US did not admit that the debtload was too high to be paid down one day (the debt then approaching the annual GNP of the US), the market rendered its verdict. Relative the huge debt facing the US dollar (and remember there are huge state debts, such as in California, Illinois and Florida!), the “crisis” facing the euro in 2010 paled in comparison. As of mid 2010, the euro was still over $1.20. Years earlier, it had been at parity. The media frenzy on Greece's debt in 2010 ought therefore to be put into some kind of perspective, and the impact of the dollar’s public debt not be lost.
It’s not clear to me that the human mind can conceptualize a trillion, not to mention thirteen of them. Yet we glide over the public debts in the US as though they were sustainable. If the US falls, it will be from within--from consolidation at the empire-level. Such a fall will likely come as a surprise to most Americans, who in being oriented to external threats tend to miss the gravity of the black hole amassing under our very noses. To be sure, the additional debt enables us to live beyond our means as a society, and such a condition can be very addictive. Perhaps the parallel question for us to reflect on is whether Rome fell from within or simply from the Goths.
Sources:
http://www.businessinsider.com/morgan-stanley-dollar-euro-reserve-holdings-2010-7#ixzz0tBDYFjMd
http://wallstreet.blogs.fortune.cnn.com/2010/07/09/central-banks-start-to-abandon-the-u-s-dollar/
Saturday, February 5, 2011
Coordinating Fiscal and Monetary Policy in the E.U.: Is Ever Closer Political and Economic Union Advisable?
0 comments Posted by Find Insurance Online at 6:42 AMInitiating a bold effort on February 4, 2011 at a summit of the European Council (composed of heads of the state governments) to strengthen the euro by coordinating fiscal policies among the 17 states that use the currency, the German Chancellor and French President laid down far-reaching plans to deepen economic and political integration for the group of states within the EU. From the standpoint of the US, a subset of states relatively integrated federally seems strange, though perhaps such flexibility will obviate a war between EU states in the future. In other words, Americans ought not dismiss the arrangement out of hat. This is not to say that bringing fiscal policy up to the EU level to join monetary policy will be easy, even for just seventeen states. The particular interests of the latter must be balanced against the interest of the ECB (the EU's central bank) for some degree of fiscal coordination and accountability.
According to The New York Times, “France has long wanted the euro zone to be on a basis that made it more important and the Germans have now accepted that logic.” Deutsche Welle reports German Chancellor Angela Merkel as saying, "We want to bring in a competitiveness pact and step by step bring about a more linear, shared growth." The New York Times reports that Merkel and Sarkozy “appeared to have reached the conclusion of many critics of the single currency who argue that the financial crisis exposed a flaw in the design of the euro by creating monetary union without either economic convergence or political union.” However, even mentioning “political union” to the heads of the state governments is like bringing a lightening rod into a crowded elevator car during a thunderstorm. Even if monetary union is itself political and requires further political and economic integration, efforts to do so will face a strong headwind at the state level. Whereas in the U.S. the objections of states to further political integration are typically easily dismissed by the U.S. Government unless a branch of that government acquiesces (e.g., the Federal Courts that have declared the Affordable Care Act’s health insurance mandate to be unconstitutional), such objections in the E.U. typically have the edge because of the power of E.U. state governments relative to the E.U. Government. For one thing, whereas the U.S. state governments are no longer directly represented in the U.S. Government through the congressional Senate, the E.U. state governments sit as the European Council and the Council of Ministers. In vital areas including taxation, approval in these “senatorial” bodies must be unanimous. With 27 states in the EU as of 2010, each state government has enormous power in deciding whether to retain fiscal policy or shift still more sovereignty over to the E.U. (in which the state governments participate via the councils, albeit under qualified majority voting on all but the most important matters).
According to The New York Times, “France has long wanted the euro zone to be on a basis that made it more important and the Germans have now accepted that logic.” Deutsche Welle reports German Chancellor Angela Merkel as saying, "We want to bring in a competitiveness pact and step by step bring about a more linear, shared growth." The New York Times reports that Merkel and Sarkozy “appeared to have reached the conclusion of many critics of the single currency who argue that the financial crisis exposed a flaw in the design of the euro by creating monetary union without either economic convergence or political union.” However, even mentioning “political union” to the heads of the state governments is like bringing a lightening rod into a crowded elevator car during a thunderstorm. Even if monetary union is itself political and requires further political and economic integration, efforts to do so will face a strong headwind at the state level. Whereas in the U.S. the objections of states to further political integration are typically easily dismissed by the U.S. Government unless a branch of that government acquiesces (e.g., the Federal Courts that have declared the Affordable Care Act’s health insurance mandate to be unconstitutional), such objections in the E.U. typically have the edge because of the power of E.U. state governments relative to the E.U. Government. For one thing, whereas the U.S. state governments are no longer directly represented in the U.S. Government through the congressional Senate, the E.U. state governments sit as the European Council and the Council of Ministers. In vital areas including taxation, approval in these “senatorial” bodies must be unanimous. With 27 states in the EU as of 2010, each state government has enormous power in deciding whether to retain fiscal policy or shift still more sovereignty over to the E.U. (in which the state governments participate via the councils, albeit under qualified majority voting on all but the most important matters).
The criteria identified in a German policy paper that circulated before the summit meeting included items that the state governments have hitherto sought to retain for themselves. According to The New York Times, the approach proposed by France and Germany is “controversial because it touches some of the most sensitive areas of policy — like taxation and wage policy — where many nations guard their sovereignty jealously.” The items identified include abolition of state-level wage indexation systems, the creation of a common base for assessing corporate tax, the alignment of pension systems and legally binding commitments to tough fiscal policies. According to Deutsche Welle, “Germany's ideas also include raising the pensionable age depending on a country's demographics, limiting wage increases, and agreeing a common tax base for corporations.” The plans also strengthen the rescue fund for the euro zone by allowing it to lend its full, €440-billion ceiling figure, and perhaps use its funds more flexibly. Lastly, with regard to stricter fiscal discipline, the plans also include the idea of a "debt brake" that would establish a constitutional limit on deficits—the existing limit of 3.5% of GNP having been essentially ignored even by Germany.
The proposal was greeted with criticism from governments that fear they may have to raise corporate tax rates or scrap deals that link annual wage increases to inflation. “I totally disagree with the current proposals,” Leterme of Belgium said. "There must be more economic cooperation, but member states must be left the room to carry out their own policies," Leterme affirmed. "Each member state has its own accents, its own traditions. We will not allow our social model to be undone," he added. To be sure, such diversity is part and parcel of a federal system, which is essentially “unity in diversity.”
Representing the “unity” part, Sarkozy, in reacting to the opposition from state governments including Ireland over taxation, said, “We will not let the cornerstones of this system be undermined.” Simply put, monetary union requires some fiscal coordination. He explained that the aim of the proposal was “not to impose the same thing on everyone.” The objective at the meeting, he added, was not a detailed agreement but to reach a consensus on a desire “for a pact, economic government and convergence.” Yet the proposal would go beyond a “pact” in that it would be binding on the states, and it would go beyond merely economic coordination, as greater political union would be involved. “The E.U. — but above all those countries that use the euro — wants to grow together,” Merkel said. Such growth would be political as well as economic. “Politically,” Merkel continued, “we will grow step-by-step closer together.” Charles Grant, director of the Center for European Reform, opines, “I think we are seeing the beginning of a euro group which could become a more important organization politically as well as economically.” However, the Dutch prime minister, Mark Rutte, may well have put up a roadblock in stating, “We welcome stronger economic coordination on the basis of best practices, but we will always remain the master of our taxes, pensions and wages.” Such tuft battles amid “states’ rights” are to be expected in a federal system that still has a place for state governments. State interests have to be accommodated, even if compromise is also needed. Ireland, for example, sees its low rate of corporate tax as one of its few weapons in the battle to revive an economy so badly battered by the crisis that it accepted a bailout last year. Estonia and Slovakia also want to protect their low tax regimes. France and Germany are not immune to the pull of their respective self-interests either, even if that pull happens to be in the direction of closer economic and political integration at the moment. For example, France and German politicians have long complained at being undercut by the E.U. states with lower corporate tax. Other states—particularly some of the smaller ones—view their interests as ironically better protected by E.U. institutions that are not embodied by the state governments. Such states dislike the fact that the new structure would be orchestrated by governments, rather than the bloc’s executive, the E.U. Commission European, which is seen by many smaller nations as a protector of their interests.
In addition to all of the particular interests of the seventeen "eurozone" states, a common and long-term interest in matching monetary with fiscal power at the E.U. level should be recognized in the E.U.. Although the tension may seem intractable, it is simply part of the messy business of federalism, which is slow and incremental, but it is also the best political system devised to accommodate both diversity and the benefits of unity at the empire scale. The state leaders who stress the differing interstate differences have a point, but the history of European integration through the E.C. and then the E.U. afford much evidence that directives and even regulations can be assuaged by the state governments to take account of the particularities of the respective states while not necessarily relegating the common interest and accountability. Dynamic federalism requires not only tolerance (for differences to be accommodated), but also patience, for two systems of government are active for any given territory covered by the federal system. As more power lies with the state governments than with that of the EU as a whole at least as of 2011, the challenge for Europeans in the second decade of the twenty-first century is not to let the former hijack the project such that the power stays unbalanced between the states and the federal authoriity of the union. Meanshile, the challenge for Americans is just the opposite: to decide whether to allow the U.S. to continue toward consolidation at the expense of any residual federalism. In both cases, there is optimality in the mean, wherein a federal balance allows for the messy tug-of-wars that characterize healthy federal systems that stay in balance.
Sources:
Wednesday, February 2, 2011
Federal Reserve to Buy More U.S. T-Bills but No State Debt
0 comments Posted by Find Insurance Online at 4:36 AMThe New York Times reports, “At their first meeting of the year, Federal Reserve policy makers voted unanimously … to continue the central bank’s controversial $600 billion plan to spur the recovery by buying government bonds.” In other words, the central bank would continue to “print money” to buy up U.S. Government debt, allowing that government to go into more debt without putting pressure on the interest rate to go up (which would cost the government more in interest payments to bondholders). Theoretically, the Federal Reserve can buy an unlimited amount of bonds because the central bank can create money. Of course, creating money relative to GNP growth can spark inflation, but the central bankers are not worries. “The Fed did note that commodity prices had risen, but cautioned that long-term inflation expectations had been stable and that measures of underlying inflation had continued to trend downward.” Even so, “skeptics fear that the bond-buying — which has the effect of further expanding the Fed’s already large balance sheet — could lead to destabilizing asset bubbles or touch off inflation.” I contend that this is a rather narrow (though certainly valid) concern; equally or more troubling for the long term is the asymetry in the Fed’s treatment of debt issued by the U.S. Government and that of the state governments. For instance, in 2010 Illinois issued $16 billion in additional debt. Whereas the U.S.Government could fall back on the Federal Reserve, the latter has refused to purchase debt from states like Illinois. Aside from the unfairness inherent in the Federal Reserve’s proclivity, the asymetry subtly undercuts federalism. In other words, the U.S. Government having an unlimited ability to have its central bank purchase its debt gives that government still another edge over the state governments, which one can expect will be even more compromised in being able to check encroachments by the U.S. Government. The resulting enervation of federalism means that consolidation may reach us sooner rather than later, at the expense of our governments being able to act as mutual checks on eachother. Another way of making this point is to charge that the Federal Reserve’s refusal to do for the state governments what the central bank is doing for the U.S. Government evinces a structural bias in our system of federalism. The lack of balance (and the underlying unfairness) ought to be of concern to the citizenry. The result may well be that the U.S. Government will be enabled to get into unsustainable debt such that the empire itself may one day collapse under its own weight at the center.
Source: http://www.nytimes.com/2011/01/27/business/economy/27fed.html?ref=business
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