Wednesday, October 13, 2010

Tuesday round up.

In a speech, Federal Reserve Vice Chairman Janet Yellen suggests additional quantitative easing may create new investment bubbles.

On Forbes, John Tamny argues the economy would do fine without the Federal Reserve.

At Zero Hedge, Tyler Durden scolds a former Fed member (currently at the Peterson Institute for International Economics) for recommending the U.S. government sell its gold.

On The Kudlow Report, Larry analyzes the market’s support for looser money:

Investor’s Business Daily reports 56 percent of poll respondents favor keeping all tax cuts in place.

On Jon Stewart (third segment), House GOP Deputy Leader Eric Cantor says Washington has ignored jobs and the economy. Stewart describes the agenda as “freedom and liberty, blah blah blah blah blah.” Cantor suggests Republicans got fired in 2006 because government got too big. No mention of sound money.

At Asia Times, David Goldman doubts Republican electoral gains will help the economy much.

On Forbes, Steve Forbes analyzes Albania’s economic success.

In The Washington Times, Richard Rahn dissects Australia’s winning economic formula.

At CNBC, Keynesian Stephen Roach makes a good point on the dangers of destabilizing China’s financial sector via “a sharp, ridiculously irresponsible increase in the renminbi.” He suggests a more constructive approach is to increase Chinese consumption while increasing U.S. savings and exports:

Last year, Reuven Brenner and David Goldman made a similar argument, built on a formal dollar/yuan link:

Currency policy is the key to opening the world to American exports. What seem like minor errors in Western monetary policy have devastating effects on developing economies. The large industrial economies are like oceangoing vessels designed to withstand typhoons; ten-meter waves may roll them but will not sink them. Not so for the fragile craft in their wake. As former Federal Reserve chairman Paul Volcker once observed, the industrial nations' deep financial markets allow participants to hedge against large shifts in currency parities. Not so for the shallow, inefficient financial markets of developing nations, in which the vast majority of firms do not qualify as derivative counterparties, and the yield curve is not liquid past the two-year mark….

China, in particular, is the natural fulcrum for America's proper economic policy. China's requirements for infrastructure and capital equipment are enormous: Two-thirds of its 1.3 billion people still live in conditions of extreme backwardness. But rather than invest in its own interior, China has diverted its savings to securities in Western currencies as a rainy-day hedge against potential political and economic disruption. America should help China stabilize its currency by a solemn and formal agreement to link the renminbi to the dollar; China in turn should make its currency convertible and open its capital market to American institutions. Other countries may wish to participate in this arrangement; with the world's two largest and most dynamic economies as an anchor, a Sino-American currency agreement would quickly become the point of orientation for the rest of Asia and eventually for other countries.

China's demand for savings, to be sure, stems in part from the one-child policy, which requires Chinese to provide for their retirement with financial assets rather than offspring. But a good deal of Chinese savings is precautionary. With a nonconvertible currency and limited outlets for investment, Chinese are apt to exaggerate their rainy-day savings.

In effect, China needs to reduce its saving rate drastically while America increases hers. Why wouldn't just letting China's currency be convertible on its own, without coordinating with the United States, be part of the solution, as some propose?

The simple answer is that China's capital markets--and, by extension, its political system--are still too fragile to withstand the tsunami-sized capital flows caused by the dollar's instability. Dollar devaluation sends capital rushing into China, distorting asset prices. By contrast, a repetition of the global liquidity crisis that followed last year's failure of Lehman Brothers could provoke massive capital flows out of China, in a repeat of the 1997 Asian crisis. As long as the United States subjects its currency to extreme volatility, China cannot take the risk of making its own currency convertible.

editorializes in support of immigration visas for entrepreneurs.

Hawaiian Libertarian offers a good list of historical quotations on the evil of fiat currency.

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