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The Smart Globalist
Commentary on the Global Economy
OK, deep breaths everyone. Now that Secretary Paulson and Chairman Bernanke have floated a massive public rescue plan and financial Armageddon seems to have been averted (at least for the short term), it is time to take a step back and think hard about what we are doing here.
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Treasury Secretary Hank Paulson attempted to soothe rattled markets on Sunday by making explicit the government’s guarantee of Fannie Mae and Freddie Mac’s securities. Unfortunately, Paulson’s vague plan to backstop the two mortgage giants didn’t seem to add much to what the markets had assumed was already there. Fannie and Freddie have always had an implicit government guarantee, and Paulson’s plan merely confirmed what the markets had already assumed: that Agency debt and guaranteed securities had the backing of the Federal government, but equity holders didn’t. So the trade that worked so well last week – going long GSE debt but short the equity, kept working on Monday. Fannie and Freddie stock finished off 5% and 8% respectively, while the much anticipated sale of Freddie Mac short-term notes went off without a hitch.
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by
Ralph Gomory and William Baumol
- updated
Apr 18, 2008 13:00
It is time to realize that globalization, while still only in its infancy, has already undermined some of the fundamental assumptions that underlie our thinking about the economy. Today, what’s good for America’s global corporations is not necessarily good for the nation’s economy. A firm that is moving production of goods or services overseas may be increasing its profits, but can be simultaneously cutting the national income and the wages of its home country. Neither economic analysis nor common sense force us to conclude that globalization and its resulting shift in productivity will automatically benefit our county, even in the long run.
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The American Public Transportation Association reports that the first quarter of 2008 saw a 3.3% increase in public transit use across the whole United States and a particularly strong jump of 10.3% in light rail usage. These gains aren’t limited to traditional public transit strongholds like New York or Boston. Cities like Charlotte, Minneapolis and St. Louis are seeing increases of 15% or more in light rail usage, despite being traditionally “car culture” urban areas. Other areas, like San Antonio and Denver, have experienced around a 10% increase in bus passengers.
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For the first time since December 1992, the Ford F-150 pick-up truck has lost its crown as the best selling vehicle in the United States. After seeing its sales implode by 33% in one short month, the F-150 dropped four full places on the best-seller list, behind Honda’s Civic and Accord, and Toyota’s Camry and Corolla. These aren’t the best of times to be a US automaker. Back in 1992, the vehicle that beat the F-150 out for the top spot on the sales list was the Ford Taurus. But since then, the US automakers have more or less abandoned the family car market to Japanese, Korean and European marques. Now that gasoline prices have risen past the $4 per gallon level and consumers want fuel efficient vehicles, US carmakers have been left without competitive products in their showrooms, and are paying the price.
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by
Shlomo Maital
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Jun 02, 2008 11:22
This book was written by a respected Harvard Business School professor who teaches and researches the links between business, government and the global economy. His book's theme is that countries compete for market share in the $44 trillion world economy and that this competition is led by governments. He examines the economic, political, social and structural dimensions of 10 countries. Based on this analysis, Vietor picks Singapore, China, India and Russia as good bets for foreign investors. He stresses the key role managers can play in shaping their countries’ competitiveness policies.
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by
Clyde Prestowitz
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May 29, 2008 12:44
The dollar seems to be fraying most around the edges. While major players like China and Japan continue to hold enormous dollar reserves, smaller, more peripheral countries continue what has become a quietly measured flight from the greenback. Recently Rachel Ziemba reported that Libya is shifting its reserves and investment away from dollars. Now, reports from Bangkok indicate that the Bank of Thailand is considering reducing the dollar weight in its reserves as well.
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Coronary heart disease (CHD) is the leading cause of death in the United States for adults over age 20. Contributing risk factors include smoking, lack of exercise, diets rich in saturated fats as well as stress. An individual develops CHD when plaque builds up on the inside of the arteries that pump blood to the heart. Eventually, the arteries begin to clog and start shutting off the heart’s critical supply of oxygen and nutrients. At this point the heart becomes starved for oxygen and the individual might experience their first heart attack. Should the clogging continue unchecked, it is only a matter of time before a second or third heart attack occurs—each bringing one a little closer to fully cardiac arrest and death. It’s not just the heart that stops at that point, but the arms and the legs and the brain as well.
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by
Clyde Prestowitz
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May 23, 2008 09:26
Recent discussions with top bankers in Hong Kong and reports in the South China Morning Post and the International Herald Tribune foreshadow the end of dollar hegemony and the rise of a triad system of reserve currencies.
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The Commission on Growth and Development, a blue-ribbon panel of policy makers, business leaders and academics chaired by Nobel Prize winning economist Michael Spence, has just released its report on creating and sustaining economic growth in developing countries. The Commission has spent the past two years researching and writing the report, and now that the final report is out, it is striking how much the state of the debate has moved away from the ‘Washington Consensus’ and towards a strong, constructive role for states in fostering and sustaining economic development.
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by
Clyde Prestowitz
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May 19, 2008 10:21
At the first annual Women’s Forum Asia in Shanghai last week, much of the talk was of free trade and the inevitability of globalization. Top political, business, and economic leaders opined that market forces beyond the control of even the most powerful governments were now determining our destiny. So it was a refreshing reality check to read the papers in Hong Kong this morning.
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by
Clyde Prestowitz
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May 16, 2008 10:08
The United States remains the world’s most economically competitive country according to Switzerland’s renowned IMD business school in its latest competitiveness index released yesterday.
Let’s see. It’s pretty much agreed that the U.S. economy is in recession or close to it. It needs a fix of about $3 billion of foreign capital a day just to keep from plunging into deep, and I mean deep, recession. The current account deficit is still running at over $700 billion annually despite a 70 percent fall of the dollar against the euro and other freely traded currencies in the last few years and despite a much ballyhooed surge in exports. In fact, like other those of other recent surges, the results of this one were short lived. U.S. manufactures actually fell a bit last month and the trade deficit grew again after shrinking for a few months. Oh, and then yes there is that sub prime loan thing that has now become a prime loan thing, and a credit card thing, and a commercial loan thing, and a bank failure thing. This is not to mention that median family income is down, that U.S. secondary student test scores are in the bottom third of all countries, that the American savings rate is close to zero, and that family and government debt are at or close to all time highs.
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by
Clyde Prestowitz
- updated
May 09, 2008 12:55
Watching the strollers and diners from my corner seat in the Casa Portuguesa restaurant in Mexico City, I sense no angst. Life seems good. The sun is out, the temperature is warm but not hot, and the cod and white wine are great.
Yet as we enter the third hour of the typically relaxed Mexican lunch, the conversation at my table turns serious. The Mexican drug lords, it seems, are now advertising publicly for recruits to their various cartels. They are especially interested in those with military or police experience and while they admit that the work may be dirty from time to time, the pay and benefits are excellent. Moreover, the work is safe – or at least it’s a lot safer than working for the Mexican government. Just to underline the point, during one recent weekend, the drug gangs executed 37 police and local leaders throughout Mexico. And just today the head of the Federal Police was executed in his home, despite supposedly being protected by one of the country’s heaviest security details.
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by
Clyde Prestowitz
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May 02, 2008 11:16
So you read Tom Friedman and you thought the world had become flat, one big global market with everyone behaving like good Adam Smith consumers and capitalists maximizing global welfare by pursuing their own individual economic interests.
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by
Clyde Prestowitz
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May 01, 2008 08:58
In 1958 when I was an exchange student in Switzerland the currency exchange rate was 4 Swiss Francs per $1. As a sixteen year old at the time, I was amazed at how cheap everything in Switzerland seemed to be when I translated the prices into dollars. I sometimes wondered if the two currencies would ever be equal and if Swiss prices would ever equal those of the United States.
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by
Stephen Olson
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Apr 28, 2008 12:22
Is it just my imagination, or does the United States no longer seem to "work". For my entire lifetime, the US always set the international standard in virtually everything that matters: technology, wealth, health, safety, infrastructure, military power, transparency, governance, freedom, moral high-ground—and on and on and on. But in recent years, we’ve seen example after example which seems to demonstrate that this preeminence—this core competency in the areas that matter most—no longer exists.
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The failure of the US financial sector to intermediate excess global savings into productive investments in the US is the proximate cause of the current financial turmoil. Financial markets were faced with a surge in the supply of investment capital, which in turn boosted demand for securities. This led to a fundamental mispricing of risk, as the search for high-yield assets drove investors into riskier instruments and promoted the use of excessive leverage to increase returns on low-yielding assets. These conditions led to a series of asset bubbles that are now unwinding, with expensive implications for taxpayers.
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This has been on the web for awhile, but it's still funny. The clip is from a British TV show called the South Bank Show and features two comedians - John Bird and John Fortune talking through the sub-prime mess. The English accent makes the role of the bankers in all this sound so much more sophisticated...
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by
Clyde Prestowitz
- updated
Mar 24, 2008 13:55
“A strong dollar is good for the U.S. economy.” How many times did Treasury Secretaries Bob Rubin and Larry Summers repeat that mantra in the face of ever rising U.S. trade deficits? Now with the dollar falling and U.S. exports at last beginning to take off and make a much needed contribution to growth, Secretary Hank Paulson is still singing the old song. “The strong dollar is in the nation’s interest,” he recently told Reuters.
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The weekend’s extraordinary actions on the part of the Federal Reserve are evidence of the amazingly precarious state of the financial markets. If there was any doubt that the current financial crisis is one of historic proportions, Sunday’s takeover of Bear Stearns by JPMorgan for $2 a share (one-tenth of the value of Bear as of last week), backed by a $30bn guarantee of Bear’s suspect portfolio of securities from the Fed, the opening of the discount window to the prime dealers, and a further 25bp cut in the discount rate should put any remaining reservations to rest.
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by
Clyde Prestowitz
- updated
Mar 17, 2008 13:55
The picture of the Fed orchestrating the takeover of Bear Stearns by J.P. Morgan and scrambling desperately to keep Wall Street afloat, brings to mind the Japanese financial crisis of the late 1980s and early 1990s in which I had personal experience as the then Counselor to the U.S. Secretary of Commerce. The two crises both resulted from the collapse of real estate bubbles that were rooted in the view that property prices could go only one way.
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by
Richard C. Longworth
- updated
Mar 09, 2008 13:55
For 114 years, what was good for Maytag was good for Newton, Iowa. Really good. In a town of 15,000 people, no less than 4,000 worked at the Maytag corporate headquarters downtown, or at the big home appliance factory on the northeast edge of town. Fred Maytag founded his company in Newton in 1893. The Maytags not only put bread on thousands of tables in Newton but reigned, in a seigniorial fashion, as the town’s first family. Every year, Newton crowned the Maytag Queen in the Maytag Bowl at Maytag Park. Kids swam in Maytag Pool, went to schools run from offices in the old Maytag home, got Maytag scholarships if they went to college, or followed their parents into the Maytag plant if they didn’t.
If there hadn’t been Maytag, there wouldn’t have been Newton.
And now there isn’t Maytag any more.
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by
Ben Carliner
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Mar 17, 2008 14:55
US dollar weakness has been a fact of life recently, as the turmoil in US credit markets, Federal Reserve rate cuts, and the large US current account deficit weigh on investor sentiment. The dollar has been testing new lows against many of the world's freely floating currencies, but many countries that peg or manage their exchange rates against the dollar have been reluctant to allow significant revaluations. So perhaps it is time to take a look back at the end of the original Bretton Woods system and see if it provides any lessons for the management of our current international monetary regime.
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by
Shlomo Maital
- updated
Mar 09, 2008 13:55
In his 1994 best-seller Built to Last, management guru Jim Collins analyzed why a handful of companies like GE, Johnson & Johnson and Procter & Gamble are able to grow and thrive for decades.
Increasingly, Israeli high-tech companies are built to ‘exit’, not to last. They blossom like wildflowers in spring. Then they are ‘plucked’ (acquired) -- and disappear in bunches into the maws of foreign companies long before maturing. An American friend, an investment advisor, calls this modern colonialism – only, it is countries’ brains that are mined, not their minerals. Another Israeli friend described Israel’s business model as ‘selling its brains at inflated prices’.
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Modern Sweden is known for its elegant, cutting edge design, its skilled engineers, its stable of world class multinational corporations, and above all, its generous social services. Sweden is in fact the epitome of the modern social welfare state, enjoying one of the highest standards of living in the world while preserving a strong emphasis on egalitarianism, social justice and thrift. But there is increasing concern that the economic model upon which Swedish prosperity was built is fraying under the pressure of globalization. Swedish firms are expanding abroad, but at home the economy is failing to create enough new jobs, and there is a worrying lack of entrepreneurial activity.
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by
Clyde Prestowitz
- updated
Mar 09, 2008 13:55
Our friend Thomas Palley has been blogging on the misguided efforts of US policy makers to head off a recession by any means possible, no matter the long term consequences. Palley's point is that policy makers are in a bind - US economic growth is dependent on asset price inflation - so the Fed finds itself in the position of needing to be a serial bubble blower. I would add that this isn't simply a problem of domestic policy. Some sort of international agreement that prevents countries from undervaluing their currencies against the dollar and puts an end to the neo-mercantilist policies of much of the world are necessary. Real structural changes to the global economy are needed if the US economy is going get out of this cycle. We can no longer be the consumer of last resort for the entire world.
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Aida Edemariam of the Guardian talks with Nobel Prize winner and Columbia Professor Joseph Stiglitz on his new book. The book, which Stiglitz wrote with Linda Bilmes and is currently promoting, is an accounting of the enormous economic costs of the Iraq War and the incompetent and dishonest planning and decision-making processes of the Bush Administration that got us into this mess.
More attention should be paid to the long term costs of the Iraq War when it comes to discussion of Bush's economic legacy. His administration will be over in nine months, but Americans (and the rest of the world) will be paying for this boondoogle for years to come.
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by
Clyde Prestowitz
- updated
Mar 09, 2008 13:55
While Senators Hillary Clinton and Barack Obama joust over answering early morning phone calls and Senator John McCain pledges to keep troops in Iraq for a hundred years in the current U.S. presidential campaign, the future of America is being determined here in the Middle-East.
To observe the scene in Doha and the cities of the United Arab Emirates (U.A.E.) along the Persian Gulf is to be reminded that the Gulf is not filled with water so much as with dollars. The housing and real estate bubble may have burst in the United States, but it shows no signs of letting up here, as a tsunami of greenbacks washes over the desert sands and makes them bloom with horizon to horizon hotels, golf courses, and skyscrapers. Indeed, part of the cause of the swooning U.S. economy is also the source of the boom here.
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by
Clyde Prestowitz
- updated
Mar 09, 2008 13:55
Despite the incredible flood of money currently pouring into the countries of the Arabian Peninsula and the Persian Gulf, they all face a potentially explosive unemployment problem that could become dangerously destabilizing in ten to fifteen years.
The populations of these countries are increasing rapidly and estimates of the number of new jobs they will need to create over the next decade are in the range of 25-50 million. Given the available wealth, it would, at first glance, seem a small matter to create suitable employment for all the new arrivals. But it won’t be. The difficulty is that aside from oil and construction related activities, the industrial and commercial base remains small and fragile, and the oil industry is not labor intensive.
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