The rise (and lesser fall) of the rest

I've recently finished reading Fareed Zakaria's latest book, the Post American World, and found myself pondering its' relevance given the upheaval and turmoil in the finance industry.

Zakaria's implicit thesis revolves around the "rise of the rest". Undoubtedly a broad topic, the book forces the reader to accept succinct and sometimes cursory treatments of different countries facing different problems, but the central tenet holds: that the future of the world, herein represented mainly as BRIC countries, does not pose a threat to America despite their growing wealth and influence. That is because the upcoming power shift is caused more by the rise of these developing nations rather than a collapse of the US.

If the developing world is only tied to, but not buoyed by, the American economy then we would expect to see the top developing countries feeling some economic pain but not the complete stagnation previous bank failures have caused. The facts seem to support this. China and India's economies will certainly slow in the coming years (heck, even the Party admits it) but they also own a more than significant portion of our debt, as do the petro-powers of the Middle East.

In fact, the main reason the Fed can even afford to buy up these toxic Wall Street assets is because the Chinese seem to have an unending appetite for dollar-denominated assets. Is this because they see the American economy as something risk-free? Well they certainly did at one point and even with the recent crisis they are still confident that their investments are safe. As Tyler Cowen puts it:

Bush, Bernanke, Paulson -- we call them leaders. The Chinese think of them as the customer service department. I suspect the Chinese get straighter answers from them than we ever do.

The point is not that foreign countries are on the path to "owning the US". This protectionist scare raised its head during the last oil boom and the Japanese rise of the '80s only to prove unfounded. What is relevant is that as "the rest" rise they are still tied to the dominance of the American economy. In fact they continue to grow both because of, and in spite of, the US. Every country that has grown mainly from FDI or an export-led model relies on the US market but will also continue to grow during our downtick. With diversified portfolios, good savings ratios, and prudent spending, many countries will continue to grow as the US falters (China, as usual, being the best example).

This is not to say that the rest of the world is immune from our economic and political fate. Rather, despite their increasing independence, countries are still entangled with US finance and capital in an increasingly murky, and politically oriented, dance. Interesting pieces in the past few days delineate just how much Europe and China both rely on and distance themselves from the US. Whether this represents the continuing dominance of the US economy or the new integrated nature of global finance is a tangled and complicated question. One thing is certain, we cannot let the model collapse. Thankfully, the US Senate took note.

Credit freeze

The New York Times reported today that many banks and financial institutions are reducing business loans. This sounds justified given the IMF's most recent report that credit risk remains elevated. There is no doubt that the sub-prime mess has spread through the economy. But personal loans should and have been tightened; they contribute little to economic growth unless in the form of overvalued housing prices or discretionary purchases. To tighten access to capital for businesses is a worrying step. This constrains the private sector expansion and innovation that contributes to overall economic growth.

But despite my views on what it may do to growth, for banks that haven't been bailed out this is probably a wise move. They should be allowed to navigate the credit crisis in what they see as a responsible and fit manner for themselves and their shareholders. But banks that were "too large to fail", and rightfully bailed out, should at least be forced to give the government a seat at the table and this is a perfect example. The current crisis and new environment present a ripe opportunity to overhaul the regulatory framework. Cyclical ups and downs will not be relegated to the past but new regulation may mitigate the impacts of future downturns to one sector or aspect of the economy.

Regulation does not have to mean outright control or even lower profits. If government officials (or at least Fed overseers - partisan ideas should not be involved) were given a short term advisory and observatory role, new rules may be drawn up in a compromised manner. This temporary set up would preclude any delusions about a new waves of GSEs and result in a new class of government wonks uniquely suited to draw up and implement new regulation based on inside understanding and access to financial and bank executives.

Economic crises require new regulation and ideas to prevent misatkes from recurring. Ideology can only carry one so far; let's hope pragmatism follows.

Economics and cable news just don't mix

I've been watching more cable news than is probably healthy since I moved back to the US. What can I say: every day is a new struggle to put off writing my dissertation. Anyways, one thing that I've noticed in particular is that the cable news format is atrocious for discussing economic news. As is such, I feel compelled to comment on two issues that I saw today:

1. The price of oil: CNN's economic "experts' have been cheering as the price of oil continues to tumble. Light Sweet Crude for September delivery is trading around $124.70 on the NYMEX. Today, they even had a poll asking whether viewers would go back to their old driving habits now that the price of gas is falling again. Easy there, CNN: oil's price fundamentals are still pointing up and any reversals may well be temporary. These days, there is high volatility within oil markets and price swings within wide margins are likely to become the norm. Oil prices may be down temporarily, but there is no evidence at this point that they'll stay down. Don't buy that new Hummer just yet.

2. The budget deficit: All the major cable networks are giving a lot of play to the new US deficit figures, the largest ever at $482 billion. Democrats are screaming bloody murder at GWB. Republicans are blaming Democrats. I don't like to take sides on things like this, but this is an election year and the Dems are really overreacting. Don't get me wrong: deficits do matter, in the sense that they signify that the government is spending more money than it is taking in. But the size of the deficit as a percentage of GDP is more important than the overall figure. Right now, the deficit is at 3.3% of GDP, compared with highs of 6% in the early 1980s. By comparison, I borrowed roughly 100% of my "personal GDP" last year to finance graduate school. Granted, this was an investment in future earnings, but many people wouldn't bat an eye at credit card bills that were higher than 3% of their yearly salary.

However, the government's budget deficit in any given year is far less important than the overall national debt, which is the total amount that the government owes from all of the times it has borrowed money to finance expenses. Again, it's important to consider this figure in relation to the GDP and GDP growth. This metric suggests that the debt isn't historically bad or unsustainable at its current level (see graph above. Source: Wikipedia.)

Enjoy cable news, but please enjoy responsibly.