Money

The importance of assets (stocks) versus incomes (flows) in economics cannot be overstated, yet it is not well understood. Michael Milken this morning in The Wall Street Journal explains why Baby Boom retirements won’t, as many believe, cause financial market instability, let alone a crash. Baby boomer asset liquidation isn’t really a financial market issue because (1) there’s plenty of liquidity in the global economy; (2) as the rest of the world becomes wealthier, people outside the U.S. will own a greater percentage of global assets and they’ll want to keep a share of their net worth in America; (3) liquidity will grow in both developed and developing nations as they adopt recent American financial innovations and market structures; (4) Read More ›

BEIJING
Yesterday’s Wall Street Journal pre-view of Treasury Secretary Hank Paulson’s China speech was encouraging. Paulson emphasized the long-term “generational” relationship that we must develop with China and emphatically rebuffed the ideas and promoters of protectionism.
at the Intl Finance Forum in “Great Epoch City”
But today’s New York Times re-view of Paulson’s speech is more ominous. The story is titled, “Treasury chief delivers new warning to China.” It emphasizes the contentious dollar-yuan exchange rate issue, asserting that Paulson “used unusually forceful language in saying that China has kept the value of its currency artificially low relative to the dollar.”
We talk about the dollar-yuan here because the success or failure of American technology and the world economy often depends on these currency and trade issues. Exchange rates may seem like arcane stuff, but when grandstanding politicians — like Senators Lindsey Graham and Chuck Schumer — threaten to blow up international trade, and thus our livelihoods and security, with their 27.5% tariff on China, we should all pay attention.

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BEIJING For the last week, every newspaper and television show here has been speculating about Treasury Secretary Hank Paulson’s upcoming visit to Singapore and China. What will he say, especially on the yuan-dollar exchange rate issue, every commentator wonders. This morning we got a preview in The Wall Street Journal, and I am mildly relieved. It looks like Paulson is emphasizing free trade, protection of intellectual property rights, and the long-term strategic relationship — and somewhat de-emphasizing the dollar-yuan issue. He still errs in pushing for a stronger yuan, but at least right now it does not seem the major focus of his visit. Treasury Secretary Hank Paulson Paulson instead appears to be taking a more “Asian” philosophical view. “Both Read More ›

This morning Dr. Arthur Laffer continues his break with most of the other classical/supply-side economists. Dr. Laffer says inflation is nowhere in sight and the Fed is doing a “stellar” job. We can all agree with Dr. Laffer that growth does not cause inflation, the Philips Curve is (or should be) dead, and that economic growth today is stronger than most observers believe. Dr. Laffer is a national hero, who helped launch the U.S. to world economic leadership and, maybe more importantly, exported his low-tax ideas to a world in desperate need of capitalism. We are all benefiting from this global transformation that he and his mentor Robert Mundell envisioned. We continue to be somewhat flummoxed, however, over Dr. Laffer’s Read More ›

Yesterday, CNN broadcast yet another program about the “energy crisis” and speculated about the events that could lead to more than a crisis — a nightmarish energy catastrophe — in 2009. But without the faintest understanding of why oil prices are high today, all these analyses, prognostications, and alternative energy schemes are worse than useless. They are dangerous. See my article on the crucial link between oil and monetary policy — “The Elephant in the Barrel” — in the Weekend Edition of The Wall Street Journal (sub. req.). Non-subscribers can go here for the full article.-Bret Swanson

This morning Daniel Yergin, the famous energy analyst and Pulitzer Prize winning author of The Prize, stumbles into the very trap I warned of several days ago. Writing in The Wall Street Journal, Yergin attributes high oil prices mostly — or even exclusively, as far as I can tell — to political, weather, and technology disruptions around the world, the most recent being that company in Alaska with the Bad Pipes. Yergin even displays a chart of oil prices “Climbing the Wall of Worry,” with the political and weather events superimposed. Trouble is, oil prices had tripled before any of these events happened. As I described in “The Elephant in the Barrel,” these relatively mild supply and demand shocks account Read More ›

A more accurate depiction
would have Federal Reserve
Chairman Ben Bernanke
balancing the oil drum
on his index finger
Nigerian pipeline explosions, Chinese demand, Arab angst, Venezuelan volatility, peak oil, and a pugnacious Putin premium: These are the usual explanations for high petroleum prices. But our discussion of the so-called “energy crisis” has ignored the elephant in the barrel: monetary policy.
Today, high oil prices are the backdrop for Middle Eastern chaos and calls for bad energy policy. It was much the same three decades ago, during the 1970s, when high prices yielded similar violence against our fellow man and against good economics. This is no mere coincidence. A weak dollar is the key culprit, now as then.
. . .
Today, commodity prices across the board, from coffee to cattle to carbon fiber, remain near 25-year highs. High oil prices are not an exception but the rule, not a unique phenomenon driven mostly by geopolitical risk and demand but just another commodity whose price is determined primarily by the value of the dollar.
Expensive oil is not exclusively a monetary event. Risk and demand do matter. But comparing oil to other commodities, especially the key monetary guide of gold, we find that elevated risk and demand explains only $10-$15 of the higher oil price. Something around $30 of the higher price is explained by a weak, inflationary dollar. The entity most responsible for expensive oil is thus the Federal Reserve.
. . .
-Bret Swanson

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Supply-side economists for decades have said that there is only one closed economy — the global economy. Economic policy must therefore take into account global movements of goods, services, people, capital, and assets. Monetary policy, in particular, must acknowledge the dollar’s preeminent place in the world economy and the effect the intrinsic value of the dollar and its value vis-a-vis other currencies has on world trade and politics. Finally, a top policymaker is acknowledging this key fact enunciated by Robert Mundell and the supply-siders so long ago. Last night in New York, Fed chief Ben Bernanke said that “the central bank would need to pay more attention to global financial conditions in setting interest rates, moving beyond its usual focus Read More ›

Mike Darda asks a very good question of those who complain of Chinese currency “manipulation”: It is telling that the anti-China crowd in Congress has not taken aim at other dollar-linked or dollarized countries with destructive tariff proposals or charges of currency manipulation. Where are the tariff threats or cries of currency manipulation against Ecuador, El Salvador, East Timor, Panama, Lebanon, Hong Kong, Saudi Arabia, Kuwait, or Malaysia, all of which either use the dollar as legal tender, fix their currencies to it, or manage them in a tight band against it? -Bret Swanson

Here are Mike Darda and Steve Forbes with the two best debriefings of the Greenspan era. Both are from The Wall Street Journal where a subscription is required. Mr. Greenspan probably made his most interesting contributions to economics in the fields of trade and productivity, where he recognized the power of the information age and helped beat back ever-present protectionist sentiment with eloquent explanations of globalization and its benefits. He surely was a savvy politician and inspired confidence on Wall Street. Yet for all his many virtues, monetary policy remains poorly understood by average Americans and even most financial and economic experts. Mr. Greenspan’s opaque and shifting rationales and methodologies leave many wondering what he actually thinks and what comes Read More ›