Notes From Underground: New FRA Podcast

On April 19, the FRA’s Richard Bonugli moderated a discussion between the highly regarded Cal Professor Barry Eichengreen and yours truly. The discussion centered around the issue of China and the Trump administration’s trade policy. The podcast was a result of a piece Eichengreen published at Project Syndicate that I cited in a recent blog post. It was a great honor to partake in a direct discussion with the professor as I have read his work on the global political economy for many years. I advise googling his earlier work on analyzing gold role in the Great Depression and many of his other articles on the EU and the EURO.

***The IMF issued its communique following a fractious meeting in Washington that concluded on Saturday. In Monday’s print edition of the Financial Times there’s a story titled, “U.S. Demands IMF Action on Trade Surpluses.” The IMF pushed at the Trump administration by advising that nations should “avoid procyclicality … and ensure that public debt as a share of GDP is on a sustainable path.” This is a direct criticism of the Trump tax reform and fiscal stimulus coming at a time of full employment.

Larry Kudlow will probably complain that the IMF was misinformed. Treasury Secretary Mnuchin returned fire at the IMF by challenging Director Lagarde to get countries that run “persistent trade surpluses to act to shrink those surpluses.” The Trump administration is making to effort to go quietly on the role of global imbalances and the negative impact on the world economy. Mnuchin summed up the White House desires: “We urge the IMF to speak out more forcefully on the issue of external imbalances,including by providing clear policy recommendations for countries with large surpluses,in support of more balanced growth.”

This sets the stage for German Chancellor’s visit to the U.S. this week. Look for Trump to give Merkel an earful about the unfair actions of Germany. French President Macron is also due this week in Washington but Trump will be soft on France because they are not deemed to be a problem. It is the export powerhouse Germany that falls afoul of Mnuchin, Wilbur Ross, Peter Navarro and Lighthizer. The ECB keeps negative interest in an attempt to give the European Union some economic traction. This provides Germany with an undervalued currency relative to its economic might. It’s tough to set economic policy for nineteen countries with one currency.


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16 Responses to “Notes From Underground: New FRA Podcast”

  1. Econosums Says:

    Internal trade deficits in the Eurozone are the best proof that the Euro is too cheap a currency for Germany.

    • yraharris Says:

      Econosums—absolutely which will be a topic this friday when Chancellor Merkelarrives in Washington–the EU will always have to ask —whose currency is it

  2. Stefan Jovanovich Says:

    I had to choke to avoid splattering the cereal this morning when I read the Professor’s paen to China’s “calm and steady hand”. If your readers are going to study the effects of gold, they should begin with 1914 and work backwards to the 18th century in the U.K., Holland, France and Spain. There was no gold standard after the European monarchies suspended all specie redemption at the start of the Great War. There was only Bretton Woods 1.0 where the U.S. continued to maintain specie as legal tender but allowed foreign exchange to be on the pretend standard – i.e. the Europeans pretend to clear their balances in gold and the U.S. pretends that foreign Treasuries will have the means of repaying loans at par. Blaming the pretend gold standard for the Depression is like blaming the police for crime; their inadequate efforts are not nearly enough but they are hardly the cause of the ruin and mayhem that poverty and stupidity combine to produce. Given what actually did happen between 1914 and 1918 shouldn’t we all have the humility to use some other word than “war” to discuss what are, at heart, questions of who will pay the taxes that are the not free part of all trade?

    • yraharris Says:

      Stefan–the world is always about debt and who gets screwed in the effort to repay or to have a jubilee—see Germany and Greece in the last five years

      • Stefan Jovanovich Says:

        David has answered Yra’s implicit question – pay how? What can Greece use other than further extensions of its Euro Dawes loan? David has also ably illustrated how the gold standard worked to clear accounts and how the modern accounting for rade is put to shame by the common practices of a world where central bank notes had no more sovereign authority as “money” (sic) than other private bills of exchange. We have no more sense of China’s ability to clear accounts in open markets than the Hope and Rothschild banks did about the Bonaparte Kingdoms once Napoleon imposed the Continental System. What we can know is that only academics are consistently credulous enough to take China’s numbers at face value.

      • yraharris Says:

        Stefan—beautiful reprise and you and david really did a nice service to Notes FRom Underground.There just is no efficient mechanism to clear the massive amount of global flows but I would argue that this was all part of the Bretton Woods—not initially but as the French warned and promoted in the 1960s—the exorbitant privilege provided the world with lubrication but it comes with a cost–the Bills eventually come due

      • Stefan Jovanovich Says:

        Thx, Yra. What neither the WW 1 suspensions nor Bretton Woods accepted was the necessity of allowing private clearings to continue. During the repeated suspensions in Britain, Holland and the U.S. that occurred between the War of Spanish Succession and the beginning of the Great War, pricing in specie was allowed to continue. The reformism of modern economics has been to insist that legal tender become a complete monopoly of the central bank. That was, of course, John Law’s ultimate resort and the best explanation for why France’s bubble was so much worse than Britain’s in its consequences. By removing all legal means of monetary arbitrage, the Duc d’Orleans created the very situation that both the EU and China seems to desire – one where you can never allow the state’s credit to be rated at all. As David has pointed out, the U.S. is having another spasm of debt fundamentalism at the very time when it is much more fully able to accept the daily verdicts of open exchanges.

  3. David Richards (@djwrichards) Says:

    The false narrative about large US trade deficits which has sadly taken center stage with the Trump Admin is much nonsense.

    The problem is that US trade data at the heart of this narrative is severely flawed.

    Recall that according to the Project Syndicate link I provided before, US trade data excludes services, which once upon a time were insignificant compared to goods, but not now. Thus in fact the US actually runs overall trade surpluses with some countries that it reports as trade deficits. And the net trade deficit for the US in total is zero or actually even a net surplus!

    In addition, when a foreign country buys (or redeems) US debt, that actually runs through the capital account so as not to distort. But US interest paid on that debt runs through through the current account, thus exacerbating the trade “deficit”. Thus a country like China or Japan should dump all its US treasuries forthwith to lessen the “trade deficit” like the Trump Admin wishes.

    Finally, a solution for the German (or Chinese, Japanese, etc) “trade surplus” with the US:.. Buy physical gold in New York and ship it overseas (then store or sell it there), as this export also goes through the current account, giving the impression that their trade surplus with the US is shrinking.

    In sum, my recommendation to Abe and Xi:
    1) Sell all US debt promptly to terminate interest payments to them;
    2) Use the sale proceeds to buy gold in US;
    3) Ship the gold overseas and sell or store it there;
    4) Then call Trump to complain about US trade surplus.

    As bullshit baffles brains.

    • yraharris Says:

      David—the tone represents all of our frustration at what passes for intelligent discussion—–besides that—BRILLIANT

      • David Richards (@djwrichards) Says:

        Thank you Yra; frustration indeed at narratives broadly accepted as truth. As America is largely a service economy, then perhaps trade metrics and policy should embrace that fact. US can’t go back to a labor intensive manufacturing economy. This isn’t the 20th century. No matter how you try, those jobs will ultimately go to the best low-cost bidder (not China anymore) or to robotics eventually. The global economy genie will not be stuffed back into its bottle, at least not unilaterally by America.

        But on the plus side, anecdotally, I see heaps of US firms and Americans here in Asia doing very well by providing lucrative services from consulting, engineering, managerial, tech to financial. Service exports which apparently aren’t all in the US trade data but nevertheless are a huge economic boost to the US. Likewise for movies, education, tourism, music, biotech/medical services, etc. Thriving industries and new industries that must be continuously reinvented & improved to retain a competitive advantage. That should be the focus of policy and efforts.

        In contrast, withdrawing from trade and cheapening the currency have been proven by history to be the road to ruin, not greatness.

    • Chicken Says:

      This sounds like a case not to sell gold, assuming the trade imbalance is actually positive and not negative as the narrative leads us to believe?

  4. arthur Says:

    Debt. Liquidity. Boom. Repeat.

  5. yraharris Says:

    A NOTE FROM YRA—the ten year yield is important but the rise of the two year note to 2.5% is far more meaningful.This caveat I will also add—the RISE IN THE TEN YEAR IS TAKING PLACE EVEN AS THE WORLD’S LARGEST OWNER OF U.S. TREASURIES DOES NOT HEDGE ITS BOOK—For the FED does not worry about potential losses because it has A PRINTING PRESS.Ben Hunt has discussed this narrative for a long time–more to follow tonight BUT MUCH TO CONTEMPLATE

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