"The United States' Exorbitant Privilege"

Behold, from Mr Setser:

How much “capital flow reversal” insurance should the world offer?

Excerpt:

......it is still striking that the emerging world did more to help the US avoid adjustment from say early 2006 to mid 2008 than the US, EU and Japan seem likely to do (through the IMF and World Bank as well as bilaterally) to help the emerging world avoid adjustment now, even with the recent expansion of the IMF.***

Call it part of the United States exorbitant privilege. So long as key emerging economies peg to the dollar and allow their reserves to rise when private demand for their financial assets rises, the US gets more protection from a sudden reversal in capital flows than other countries with large deficits.

But also call it part of a broad system that has resulted in a persistent uphill flow of capital — and thus part of a broad system that led the US to run larger external deficits over the past few years than really were healthy.

That broad system is unsustainable, and in my view essentially ended in August 2007.

Thus far, not too terribly much has taken place to replace it. (There's a continuing hope that all might be well post-Great Recession) Not. But replace the existing system we must. For my money, it begins here in the US with an actual solution to the banking crisis (break up Citi and BoA, break the grip of Oligarchs etc...), moves next to an awareness that US 'consumers' are no longer such (Obama very much understands this), and then on to getting serious with China/Voldemort (and other large exporters) about over-capacity and currency manipulation....

Down the Chinese path to ruin

No, not currency manipulation nor militarism nor the subjugation of Tibet

Rather, this:

China Influence Grows With Car Sales
By KEITH BRADSHER 1 minute ago
China, where car sales have recently passed those of the United States, is increasingly poised to take on the role of global trendsetter.

The Times chooses to accentuate greenish cars in this fluff piece, but please. Ecological catastrophe anyone? And aided and abetted by Western countries (Germany, US, UK, Italy) supposedly hip to global warming and environmental disasters....

What the world needs now is Chinese aspiring to Porsches. An earlier, more honest assessment had this take: Porsche Chooses China for Entry Into Sedans

Same reporter (Keith Bradsher). Different editors?

China doesn't manipulate its currency?

So sayeth the Geithner Treasury, disappointingly: US declines, again, to brand China manipulator



Reuters had been expecting otherwise: US seen citing China on currency-business leader


Would that Reuters had been correct.


Macroman nailed it in January, in #8 of his predictions for '09:



8) China will NOT stop taking the piss in currency markets. In Macro Man’s ideal world, China pulls the bid in USD/RMB, slashes its FX reserves by 75% and uses the money to fund the beginnings of a domestic social safety net, and thus buggers off from trading EUR/USD. His ideal world also entails the Pittsburgh Pirates winning the World Series and West Ham the European Cup….so a cursory glance at the sports pages will confirm that we are pretty damned far away from that ideal.
While there has been a bit of sturm und drang emanating from Beijing recently about the inutility of accruing more reserves and/or buying more Treasury bonds, there is also the small matter of the economic downturn and the desire to maximize net exports. Macro Man suspects that the latter consideration will prevail in domestic policy circles, which makes sense given his views on the dollar and US bonds. As the chart below demonstrates, the rise in FX reserves in China has been inexorable (if you don’t already, tune in to Brad Setser for ongoing analysis of this issue.) So for better or for worse, we’ll all have to continue living with Voldemort, the cockroach of global finance.



Now, since MM penned these words the Chinese have altered their reserve allocations as Brad Setser indeed continues to point out. But the currency manipulation continues. We merely prefer to call the yuan 'undervalued'. HAH

American decline, realpolitique, or delusion? Bits of all three, I think. I'd prefer just being blunt, as the Chinese have been towards the US lately.

Chinese autos, US pensions

Bad news both:

1. China: Record Auto Sales, Now #1 Auto Market Global warming and massive pollution anyone?
2. The Pension Problem Isn't Going Away Indeed. Nor is the dollar's long-term weakness

Fun

International developments are, ummmm, unsettling, to put it very mildly

Three things here, in particular:

1. That crucial G-20 meeting is shaping up to be, as the Brits say, a cock-up No Clear Accord on Stimulus by Top 20 Nations
2. China, with much very good reason, is not pleased with their US 'investments' China has more to worry about than its Treasury holdings (thank you Dr Setser!)
3. Pakistan is on the brink of collapse Clash With Police Melts Into Huge Rally

So, you have, over the past three days, a confluence of almost impossibly bad news that many have long dreaded.

In order, from incredibly bad to horribly worse to unspeakably worst:

• A recurrence of 1930's-style global governmental disfunction/protectionism (which led to The Depression).
• China signaling, in no uncertain terms (for them) that the punch bowl will go away if the US doesn't get its fiscal and monetary act together. Where's the money for US debt gonna come from? And why, pray tell, won't the dollar collapse?
• The worst of all possible geo-political messes going, errr, nuclear? And in a very bad neighborhood....

Folks - things are shaping up to be calamitous, with a global Depression, if not a global economic collapse, in the cards. And I haven't even mentioned that the world's banking system is still in the final stages of self-destruction, with French Revolution-style anger being directed (quite accurately) at the 'leaders' therof. This weekend's greed mongering by AIG sure doesn't help matters

But count on most attention to be paid manana to whether the stock market rally will be sustained for another week or three.

This is getting Shakespearean. All the main players in this drama are tragically flawed, self-obsessed, fatalistic, and increasingly doomed. Yet none are able to perceive it: The G-20 cannot act in its collective interest due to parochial concerns; China cannot admit that they are very much at fault for over-saving and currency manipulation; the US is timid yet still arrogant in the face of creating and furthering the banking crisis; and the whole world is hoping that Pakistan can be fixed by act of god

Thus continue to be sewn the seeds of our destruction: we know the demons we face, yet lack the will and the capacity to face them