Balkinization  

Saturday, November 25, 2006

The threat to the dollar

Sandy Levinson

Several weeks ago, in response to a posting on whether increasing Chinese ownership of American debt posed any threat to the US economy, there were many postings celebrating the economic rationality of the Chinese, as good capitalists, and how they had a vested interest in maintaining a strong dollar, precisely because they owned so many of them (and, of course, depended on a strong dollar, relative to the undervalued Chinese currency, to finance the trade of Chinese goods to the US). So what are we to make of the fact tht the dollar crossed what analysts view as the psychologically significant $1.30 to the Euro mark? There is no immediate news that would trigger the selling of dollars, as Floyd Norris points out in the Times, so one might consider the role played first by the increasing trade deficit of the US and rumors that the Chinese, who have no trust in the competence of the current US government (my words, not his), might hedge their dollar funds by buying some Euros. Economic rationality might not, after all, counsel hanging on to the dollar for dear life.

Should the dollar collapse, one wonders what impact that might have on the complacence of Wall Street with regard to the acceptibility of the Bush White House. It's one thing, after all, if children of the lower orders lose their lives in Iraq; that has no influence on the obscene profits (and bonuses) made by hedge fund managers and other Wall Street barons. But a vivid collapse of the dollar might lead some of them to lament the fact that there's no way to dump the current Chief Executive (who gives no indication that he has ever thought seriously about economics, though we do know of his proclivity for firing anyone who dares to speak any truth about the costs of his policies, whether the Iraq War or the cost of his subsidy for the pharmecutical industry, also known as prescription drugs for the elderly) in favor of someone more competent. Though, of course, perhaps Secretary of the Treasury Paulsen, a Wall Street King, can beg and cajole Beijing into continuing to serve US interests, though one wonders, of course, what the price will be. But, hey, this is capitalism, and we all know that the invisible hand always works out for the best!

In response to my earlier postings along this line, Anne (from Holland) has suggested that the real problem is the presidential system, that parliamentarianism solves the problem of what to do with a leader in whom the majority has lost confidence. Perhaps he's right and that our fundamental error was to go the presidential route in the first place (in part, no doubt, because we had George Washington as a model of what a noble president would look and act like, which in many ways turned out to be the case). But how many of our 42 presidents since Washington have discernably contributed to leaving the country better off (as compared, say, with the various British Prime Ministers since William Pitt or the various Canadian Prime Ministers since 1866).

Comments:

I would rephrase your last question.

How many Presidents were able to engage in behavior for our nation's betterment because of the insulation provided by our current system that a prime minister in a Parliamentarian system could not likewise do (without suffering a vote of no confidence)?

I personally have no idea.
 

I know I said that a vote of non confidence will not work in a presidential system. A vote of non confidence will only work in a parliamentary system. But this is not to say you should cross over to our system.

It seems to me that we are looking for a silver bullet that simply does not exist. We are looking for a system that is incorruptible, but I am afraid that simply does not exist. Prof. Levinson is trying to find a constitutional solution for an incompetent president, while this is not what the constitution is about. The people should not elect an incompetent candidate, the parties should support an incompetent candidate or continue to support an incompetent president. Remember that Bush was reelected.

Each system is corruptible: take Iran. If I remember correctly they have this wonderful liberal constitution in which men and women are equal. While keeping there constitutional they perverted the system and installed the mullahs.

It is the people that should make the system work. Not the system that makes the system work.
 

I'm not sure Pitt the Younger is good evidence of the advantages of the parliamentary system. In contrast to Bush, he was competent, but Pitt's record on civil liberties makes Bush look like Madison.

It's hard to compare the two positions given the different social conditions, etc. A reasonable comparison might be made between Britain 1832-1914 and the US 1920-present. Those time periods capture the highpoint of empire and economy, so in that sense they're similar.

On the plus side for the British you'd have Disraeli, Gladstone, Peel, and ... Palmerston? Any other nominees? The rest seem fall in the range of "adequate" to "not really disastrous".

On the plus side for the US I'd put FDR, Truman and Eisenhower. The others were decidedly mixed. I don't think the British ever had anyone as bad as Hoover, Nixon or Bush II, though Salisbury gave them the Boer War and Asquith bears some (but hardly all) of the responsibility for WWI.

I'm not sure this proves much except that other factors play a big role in how we assess leadership. When a great power is at its peak, the leaders get a lot of credit for things they may have little to do with. When things go bad, they may similarly be blamed. I'd say there's some evidence that the parliamentary system minimizes the downside risk.
 

Excellent post Anne.
 

I've had this discussion with my Canadian colleagues. They are currently experiencing the down-side of parlimentary governance. WHile the Harper government is ultimately expected to fail, right now it's riding roughshode over all manner of domestic agencies. Unlike the US, there's really no way to stop a PM from implementing wholesale change.

The Tories, to the utter horror of the Liberals and NDP, are hoping to downsize the government and eliminate the surplus, in hopes of a permanentaly reduced federal role. The Tories can keep at this only as long as Parti Quebcois (s?) remains part of the coalition. THink of a Nadar/Bush alliance in 2000. I suspect Harper will eventually be immolated by Quebec, but for now it makes for really interesting politics. Our system is very slow and cranky (sometimes dangerously so), but it does have its charms at times.
 

"Prof. Levinson is trying to find a constitutional solution for an incompetent president, while this is not what the constitution is about."

I'm not sure what this means. The Constitution "is about" the best system for our particular situation, including choosing the best leaders. This includes various checks on an "incompetent" President.

"The people should not elect an incompetent candidate, the parties should support an incompetent candidate or continue to support an incompetent president. Remember that Bush was reelected."

Sure enough, but even when this happens, checks on in place. They shouldn't pass and support unconstitutional laws either. This is the end of things either.

As to him being re-elected, Prof. Levinson questions the nature of our system, which in part of the reason he was re-elected. Or, elected in the first place.

Surely, the people matter. They matter in any system. Thus, the text of the Constitution or any law is meaningless w/o an underlining spirit that follows it. But, this fits his favored proposals too.

Anyway, though I sorta second the first comment, this continual focus on the President seems ill-advised. It takes more than one to tango here. But, suffice to say, a good many of them did do some good in this country.
 

Maybe there is a third option: The president gets to pick his administration but they can only stay on collectively or individually if they have the confidence of the house.
 

I think that Mark Field is being unfair to Herbert Hoover. He was, obviously, far from perfect, but one should not underestimate the importance of the fact that Democrats after 1930 had no incentive to work with him on helping to solve the Depression, lest his own campaign for re-election in 1932 be strengthened. He was not without some ideas, however limited his imagination was. But, recall, FDR's campaign in 1932 was scarcely full of ideas, only the promise that he was not Herbert Hoover.

AS to perverse incentives, I think that Shaq is one to something important. The optimal Republican strategy is to torpedo any efforts by Democrats to look as if they can do anything genuinely valuable or important with regard to public policy. It may be, of course, that strains within the Democratic Party will do the torpedoing, with minimal Republican contribution. But should the Democrats actually agree on policies, then I predict filibusters and vetoes. Recall Bill Kristol's epochal memorandum in 1993 cautioning Republicans against any cooperation with Bill Clinton in resolving the medical care crisis, lest it lock in the Democratic Party as the majority party. And, at that time, the Republicans didn't even control either chamber of Congress or the presidency.
 

I certainly wouldn't hold the British parliamentary system up as a great example. The problem with allowing certain politicians to have dual roles in the legislature - as both MPs and ministers - is that it creates a huge payroll vote of people who will vote with the government whatever happens. It also strengthens the whipping system, as MPs depend on the government for their future careers. It means that the government controls what is discussed in parliament. For example, we haven't had a debate in government time on Iraq since the war began. Tony Blair's recent decision to give evidence to the Baker-Hamilton commission was highly ironic, as he has totally refused to hold a similar inquiry in the UK after parliamentary demands.

I spent some time working in Congress in 2005, and have worked in the House of Commons before. Despite the criticism that is directed towards your political system, I think it does allow the individual representative to operate with more independence and prevents over-mighty intervention by the executive in the law-making process.

You're right in that a parliamentary system could, in very rare circumstances, give the opportunity for a sitting PM to be ousted. Normally, however, it will only be a select group of MPs who are considered to be influential by the governing party, who can have any effect (see Thatcher and Blair's troubles recently). The first past the post electoral system we have here means that governments are nearly always elected with huge majorities - 179, 160 or so and 66 for Blair's three terms. It's no wonder, then, that only one vote in the Commons has gone against the government in the whole of Blair's premiership... This is hardly conducive to proper scrutiny.

I can see why you think there should be a mechanism for ousting a president mid-term, but you have to weigh up the overall pluses and minuses of the constitutional system you operate in. I think the American system is far far better than most parliamentary systems.
 

Unfortunately, I don't really disagree with John Wilkes! That is to say, I think that his criticisms of British parliamentarianism are altogether to the point. (I would be particularly wary of a unicameral parliament in the US, incidentally: We're just too big.) I think the biggest problem with the UK system is one that he evokes, that Parliament simply can't be taken seriously as mechanism of providing genuine oversight. We have seen that the US Congress, when in the hands of the president's party, is no great shakes either, which is why I think there is merit to Daryl Levinson's and Richard Pildes's suggestion that certain committees dealing with defense and the like be reserved for the "opposition" (to the president) party.
 

Sandy-

While the House of Commons is dominant in the UK, it is debatable whehter we actually have a unicameral system. The House of Lords does provide a vital role in delaying some bills and can sometimes force concessions, particularly at the end of parliamentary sessions (as it did last year with some of Blair's anti terrorism legislation). Since most bills are just nodded through the Commons, the only real scrutiny we get is from the Lords.

Having said that, you are right in that the upper house does not have a veto on legislation in the way that the Senate does in the U.S. To me this is another real disadvantage of the UK system - no matter how small our country is! As with most of our political structures, the problem is historical. I won't bore you with my thinking on House of Lords reform, but I will say that it'll be interesting to see whether the Lords' powers are increased when the chamber is made more democratic (as is expected in the next couple of years).

As for the idea on committees, it is something I would totally support. The volume of business in modern government means that the need for minute scrutiny of executive action is more essential than ever. Over here, the Public Accounts Committee in the House of Commons is controlled by an opposition MP. It has an independent investigative department to assist it (the National Audit Office) and has been hugely effective in scrutinising overspends on a variety of government projects. Sadly, both the foreign policy and intelligence committees are government controlled.
 

I am unsure how exchange rates are an entre into yet another debate over whether the US should adopt a parliamentary system, but I would make like to clarify the economics here.

China has pegged their currency to our dollar at an artificially low level and then adopted a mercantilist export strategy like the other Asian Tigers in the 70s and 80s.

(Stop me if any of this sounds familiar.)

What this boils down to is that China accepts our currency to pay for its goods at a arbitrarily low price. In effect, they are paying us to buy their goods. This effect becomes more pronounced when our dollar falls in response to Chinese imports.

The complaint about this generosity is that our workers will be unemployed because they are competing against Chinese making cents on the dollar. However, at around 4.5% unemployment, it is hard to see the unemployment lines caused by Japanese, er.. Korean, er... Chinese imports. Why? Because the Chinese and the other Asian Tigers have no place to invest their dollars except back in US businesses and US government debt, which boosts our economy.

Have you ever wondered how Americans can own so much material wealth when their salaries are not rising very quickly? The answer is that export driven countries are literally giving away their products to us.

With the economics explained, tell me again why this bounty should be the basis for yet another of your attacks on this President, especially since this has been going on for over a generation now.
 

Perhaps Bart is right, but I confess it sounds something like a Ponzi scheme to me, in which the "winner" is the person who recognizes when the scheme has reached its limit and bails out before the other suckers do.

So are the economic pundits simply wrong when they report rumblings about the Chinese possibly selling off some of their dollars becasue of what they see as structural weaknesses in the US economy?
 

Sandy Levinson said...

Perhaps Bart is right, but I confess it sounds something like a Ponzi scheme to me, in which the "winner" is the person who recognizes when the scheme has reached its limit and bails out before the other suckers do.

Mercantilism has always been a ponzi scheme based on currency and price manipulations whose losers are the workers and consumers of the mercantilistic country and generally only benefits the business owners. Adam Smith was the first to expose the problems with Britain's mercantilism. There has been a great deal more work backing up free trade since then.

So are the economic pundits simply wrong when they report rumblings about the Chinese possibly selling off some of their dollars becasue of what they see as structural weaknesses in the US economy?

There have been rumors of this for years now. Here is why selling off dollars would be highly problematic for China.

China pegs its own currency to the dollar, gains the vast majority of its export income in dollars and hence has enormous investments in dollars.

If it sells off dollars and starts a devaluation of the dollars, then its income and investments are similarly devalued.

If China shifts to pegging its currency to an alternative like the Euro and the dollar falls, then its goods become much more expensive in its primary market, the US. Naturally, we will buy far fewer Chinese goods and again Chinese income will drop.

That is why the rumors of a sell off are usually never realized. China may shift investment vehicles to gain more income, but they cannot afford to pull out of the dollar.
 

But other elements come into play: 1) a loss of confidence by other players and markets in the dollar, which China is unable to counteract, and has little choice but to dump dollars in exchange for for Euros to subsidize their exports to the Eurozone, and 2) the internal pressure in China to raise the standard of living, by increasing the buying power of the yuan. ...

Is a Ponzi scheme like this stable?


Your 1 and 2 are in tension with each other. If the Chinese government gives in to the internal pressure to consume, that will raise the relative price of the yuan and reduce the trade deficit with the US. That, in turn, will reduce their dollar holdings and their risk of a collapse of the dollar. While this would reduce pressure on the dollar, it would also mean that we couldn't use China to finance our deficits.
 

jojo said...

Bart and Sandy agree! But mustn't the bottom eventually drop out

Sure it will. You can manipulate the markets in the short term, but the markets always win.

At some point when China's efficiency gets somewhere close to ours, the country will become dissatisfied with the relatively low return for its goods and allow its currency to float on the free market. China's currency will appreciate dramatically compared to the dollar to it's real value and our trade balance will begin to correct.

Free markets and trade are always superior in maximizing consumer wealth to market manipulation whether it be communism or mercantilism.
 

In other words, if by 2) China allows the value of the yuan to rise, and stop burying their dollars in T-bonds, our printed dollars will not be as readily absorbed, leading to a loss in confidence (1).

If the yuan rises, China will buy more exports, some of them from the US, and we will buy fewer Chinese goods. This will trade dollars for goods, thereby reducing the dollar holdings of China. Taking dollars out of the market will increase their value. This is the opposite of a "dollar dump" by the Chinese -- they aren't likely to do that because they get stuck just as we do in that event.

This transition is going to happen because the economic and social pressure for it is increasing. The downside for the US is that it will cost us more in the short run to buy all the goodies we like to import. IOW, we'll reduce our standard of living by retiring our debt.
 

I'm missing how the Chinese using dollars takes it out of the market. If the Chinese buy something like bonds from the US government, that effectively destroy those dollars for the term of that bond. But if they buy goods from non-governmental sources, those are dollars now on the market, and not being buried for a rainy day.

What happens now is that (1) we buy Chinese goods, giving the Chinese US dollars to do so; (2) the Chinese use those dollars to buy US bonds, which they hold as an asset and receive interest.

If the yuan rises, what will happen is this: (1) we will buy fewer Chinese goods; (2) the Chinese will buy more US goods. In order to buy those US goods, the Chinese will need to have dollars. They'll have to sell our bonds to get those dollars. Thus, we'll get more dollars back into the US which we will tax and (should) use those tax receipts to retire the bonds. This will alleviate the risk that the Chinese will dump their remaining bonds -- as there are fewer bonds outstanding, they will increase in value.
 

I'm also worried abut inflationary pressures, and not just the value of our bonds.

Yes, but to the extent the bonds serve as money -- they can be sold on the market for dollars, plus they earn interest -- they themselves add to the inflationary pressure. Basically, any "excess" (putting aside for the moment what that means) of bonds overseas tends to drive down the value of the dollar internationally. That's just another form of inflation, but we off-shore it instead of limiting it to the US internally.

It would relieve pressure on our ability to borrow, so that part of the inflationary pressure could add up to zero, though I doubt it; dollars come on the market, but we can slurp them up by getting them as taxes, and selling more bonds.

Right. As long as we sell more bonds, we run the risk of flooding the US (or even the world) with money. That's inflation.

Additionally, wouldn't retiring the bonds put dollars back out on the market: while the dollars are in bonds, they're not being used directly as currency, but in order to retire them, you have to print more dollars --- so we've just lost the counter-inflationary pressure of taxation, which is to burn up dollars.

As long as we use tax receipts to pay off the bonds, there are no "new" dollars created -- the government takes with one hand and gives with the other. If we just print money to buy them back, then of course that's inflationary.
 

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وجود الموظفين المدربين بشكل صحيح يضمن أن شركات تنظيف في الرياض سوف تعطيك خدمة تنظيف متوفرة. ومن المهم أيضا التأكد من أن الموظفين وتدريبهم بشكل صحيح لخاصية معينة (مثل الأرضيات ومكاتب) يمكن عن طريق الخطأ خدشها إذا تم تنظيفها بشكل خاطئ، لذلك نعلم أن موظفي شركات تنظيف تم تدريبهم بشكل صحيح في التنظيف والتأكد من أن خدوش الهواة نتيجة للتنظيف بشكل غير صحيح لن يحدث.
شركات تنظيف شقق في الرياض كثيرة. ولكن ما يميزنا عن غيرنا هو جودة الخدمات لدينا وولائنا للعملاء حيث أن أهم شىء بالنسبة لنا هو راحة العملاء. نحن متاحون طوال الأسبوع لذلك لا تقلق إذا كانت هناك حالة طارئة
شركات تنظيف فلل في الرياض عادة ما تكون متاحة من الاثنين حتى السبت مع العمل نصف يوم في عطلة نهاية الأسبوع. ولكننا نعمل علي مدار الأسبوع.
تسربات المياه يمكن أن تحدث في أي وقت دون أي تحذير، وقد يكون الوقت متأخرا جدا قبل أن يعرف أحد في المنزل عنهم. للكشف عن مثل هذه التسريبات نحن نقدم شركات كشف تسربات المياه في الرياض حيث نقوم بإستخدام جهاز إلكتروني للكشف عن التسريبات و يتم وضعه في المكان الذيمن الممكن أن يحدث فيه تسرب.
من الخدمات الأساسية التى نقوم بتقديمها هي نقل وتخزين الأثاث فى السعودية وتنقسم الي شركات تخزين الاثاث في الرياض و إنشاء مسار واضح ودون عائق للأثاث الذي تحركه. تأكد من أن جميع الأطفال والحيوانات الأليفة بعيدين عن طريق الأذى قبل بدء التحرك والتواصل مع الآخرين الذين يساعدون و أنت تتحرك. شركات نقل اثاث في الرياض ، ومما لا شك فيه أن الجميع يبحث عن الطرق الخاصة بنقل الاثاث على اعلى درجة ممكنة من الأمان ؛ حتى لا تتعرض المنقولات لحدوث أى تلف أو ضرر.و يمكنك ايضا الاستعانو ب شركات نقل عفش في الرياض
هناك العديد من التساؤلات التى تدور فى ذهن كل منا حول مدى تأثير المبيدات الحشرية التى نستخدمها فى المنزل على الأطفال أو الحيوانات وماهى المواد السامة التى تحتوى عليها وتكون فتاكة بالنسبة للحشرات ، خدماتنا فى مجال مكافحة الحشرات عالية جداً حيث نقدم شركات مكافحة حشرات في الرياض.
القضاء على الفئران عن طريق المصيدة التى توضع للفأر ويوضع له فيها الطعام المحبب للفئران الذى تعشقه الفئران ومن هذه الاطعمة الجبن بكل أنواعها وخاصة الانواع الغالية منها مثل الرومى أو الريكفورد أو الشيدر ومن الاطعمة المحببة للفئران أيضا الطماطم المخلوطة بالدقيق أو شرائح الدجاج المخلية و نحن نقدم شركات مكافحة الفئران في الرياض.

 

شركات الاوائل من اهم الشركات التى تعمل فى مجال التنظيف وتتمتع بتاريخ عريق فى مجال التنظيف وبالاخص فى تنظيف الكنب فاذا اردت ان تشعر بالفرق الواضح بينا وبين اى شركات اخرى تقوم بنفس الخدمة فعليك ان تستعن وتتصل ب شركات تنظيف الكنب في الرياض على الفور وتاكد انك سوف تشعر بالفرق الواضح بينا وبين اى شركات تقوم بنفس الخدمة على الاطلاق.
لا تترد في الحصول علي شركات مكافحة الحشرات في الرياض من شركات الأوائل للتخلص للأبد من إزعاج الصراصير و النمل الأبيض و البق و غيرها و الحفاظ علي منزلك نظيف و جميل.
البقع الناتجة عن فضلات النمل الأبيض أن تسبب مشكلة صعبة حقا بالنسبة لأصحاب المنازل. ويمكن أن تكون عنيدة جدا ويصعب إزالتها في بعض الأحيان ولكن شركات مكافحة النمل الابيض جنوب الرياض هذا لن يكون سببا للقلق بالنسبة لك بعد الآن حيث أننا الأفضل في مجال تنظيف و مكافحة الحشرات بشهادة عملائنا السابقيين و الحاليين.

 

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