Periphery Rising:
by Doug Noland April 03, 2009
prudentbear.com
The Shanghai Composite, China’s leading equities index, has posted a 33% y-t-d gain. Taiwan’s Taiex index has gained 20.4% so far in 2009, with major indexes in South Korea up 14.2%, Indonesia 10.7%, Philippines 8.3%, Hong Kong 8.7%, and India 7.3%. Russia's RTS index has posted an 18.1% y-t-d gain, with fellow “Bric” nation Brazil up 18.0%. Benchmark Brazilian dollar bond yields are down 60 bps over the past month to 6.40%, and Mexico’s dollar bond yields have declined 100 bps to 5.91%.
This week, G20 leaders lent extraordinary support to global reflation efforts. Anthony Failoa and Mary Jordan captured the essence of the G20’s accomplishment in their article featured in today’s Washington Post:
“The $1.1 trillion pledged by world leaders to combat the worst economic crisis since World War II effectively amounts to a rescue package for both poor and rich countries, potentially including the United States. The bulk of that money will be channeled through the Washington-based International Monetary Fund, which emerges from the summit with a vastly redefined and enhanced mission. The IMF has long focused almost exclusively on helping developing nations in crisis. As part of Thursday’s agreement, it will take the extraordinary step of effectively extending a $250 billion line of credit to boost liquidity in nations hobbled by the credit crunch, with the bulk of the funds going to the industrialized nations of Europe, United States and Japan. The fact that the United States, for instance, could draw as much as $42.5 billion of those funds to help jump-start domestic lending underscores the breadth of the global plan, which has both short-and long-term fixes for a crisis that has hit nations small and large, wealthy and not.”
In our age of really big numbers, the G20’s pledge of $1.0 TN of loans and guarantees for new IMF (bailout) programs and another $100bn for World Bank lending didn’t raise eyebrows. It is nonetheless an incredible case of institutions virtually given up for dead coming back to adrenaline-induced vivacity – and likely sporting greater influence than ever before. “Developing” economies - having feared they had nowhere to turn for help in stabilizing their financial systems and economies - suddenly know precisely where they will be greeted with open arms. IMF director Dominique Strauss-Kahn celebrated the organization’s newfound “firepower” and exclaimed, “The IMF is back”! The International Monetary Fund’s new resources and mandate must have the “Periphery” pinching themselves with giddiness. Markets are giddy.
If pledges and commitments are indeed fulfilled, the IMF will possess a formidable $750bn war chest to do battle with. In addition, the IMF will expand (“print”) its own currency of account – “Special Drawing Rights” (SDRs) by $250bn – to be distributed to member countries large and small. This is a nice win for Chinese and Russian policymakers that have been calling for SDRs to play an expanding role as a world reserve “currency.”
Today, from Bloomberg’s Rich Miller and Simon Kennedy: “Global leaders took their biggest steps yet toward a new world order that’s less U.S.-centric with a more heavily regulated financial industry and a greater role for international institutions and emerging markets… ‘It’s the passing of an era,’ said Robert Hormats, vice chairman of Goldman Sachs International, who helped prepare summits for presidents Gerald R. Ford, Jimmy Carter and Ronald Reagan. ‘The U.S. is becoming less dominant while other nations are gaining influence.’
The days of the U.S. dictating the workings of the Group of Five (the U.S., France, Germany, Japan, the UK), later the G-6 (Italy was included), the G-7 (Canada was added in 1976), the G-8 (when Russia was included) or even the G8+5 have given way to altogether different power dynamics with the relatively nascent G20 (Group of Twenty Finance Ministers and Central Bank Governors).
Having accumulated Trillions of (chiefly dollar) reserves during the Bubble years, China, Russia, India, Brazil, OPEC and others today wield unprecedented power and influence when it comes to the course of international policymaking. U.S. influence has waned remarkably. And the days of the Washington-based IMF responding to global crisis by imposing monetary tightness, fiscal discipline and economic overhaul (i.e. SE Asia 1997) are over. From an analytical perspective, the (U.S.) “Core” and the (“developing”) “Periphery” of the world system are these days atypically like-minded when it comes to supporting the cause of unbridled global bailouts, stimulus, and reflationary measures more generally. It all provides ample fodder to fuel the ongoing inflation versus deflation debate. Yet when pondering the prospective global monetary structure perhaps the strongest case is to be made for Ongoing Monetary Disorder.
One could reasonably argue that the “Core” has made such a mess of domestic and global finance that a shift of power out to the “Periphery” couldn’t make things any worse. From a Credit perspective, however, there are important nuances. For decades, the U.S.-dominated “dollar reserve” system at least at the margin constrained “Periphery” Credit systems. Regrettably, this dollar-based "system" failed to discipline the U.S. Credit system, and this failing has led to the failure of this monetary structure.
The dysfunctional global “system’s” recurring boom and bust cycles saw the “Periphery” hopelessly flooded with hot “money,” only to then have these Credit systems crushed by the inevitable reversal of speculative flows. The “Periphery” became absolutely fed up. More importantly, they are now finally in a position to do something about it. A new system is in the works that would seemingly ensure that even the “Periphery” becomes insulated from market discipline.
Today from the Los Angeles Times’ Don Lee: “Could the world’s currency of choice have the face of Mao Tse-tung on it, not George Washington? Quixotic or not, the Chinese are preparing for that day. In a series of what might be called baby steps, Chinese officials recently have moved to globalize the yuan and promote its influence overseas, with Shanghai designated as command central. Since last December, China has signed deals with six countries, including South Korea, Malaysia and most recently Argentina, for currency swaps that would inject Chinese money into foreign banking systems. That would allow foreign companies to pay for goods they import from China in yuan, bypassing the dollar… Beijing is also taking initiatives to use the yuan… to settle trade accounts between some Chinese provinces and neighboring states… ‘The central bank has set promoting the renminbi for payment settlements as the main task for this year’s work,’ said Shi Lei, an analyst… at Bank of China… China is also spreading the yuan’s influence in Asia by making loans and investments in other countries…”
The media and Internet are abuzz with commentary contrasting the declining U.S. position to that of China Rising. For the moment, my analytical focus is not in passing judgment on disconcerting secular trends. I’m instead trying to figure out the more immediate consequences of (moving-target) reflationary policymaking at home and abroad. Many analysts that focus primarily on the U.S. Credit system and economy see only an intractable deflationary spiral. Examining the incredible global policy and monetary backdrop, I see potential “firepower” that I do not want to dismiss or underestimate.
When the technology Bubble burst in 2000, there was an unappreciated fledgling Mortgage Finance Bubble poised to balloon to unimaginable extremes. I have theorized that a Global Government Finance Bubble today exerts a robust inflationary bias, counterbalancing the collapse of the Wall Street Bubble. The extent and duration of this ongoing “counterbalancing” is an open issue of great significance. I view the resuscitation of the IMF and World Bank as critical developments for the unfolding Government Finance Bubble thesis. I view the heightened role of the “Periphery” in global matters as supportive of global “reflation.” And, most importantly, I view the dynamic of an increasingly assertive China as integral to global reflationary efforts.
Back in 2000, conventional thinking (including that of the Fed) was convinced the collapse of technology stocks equated to the bursting of THE U.S. Bubble. Similarly, today the bursting of the U.S. Bubble is thought to correspond with the bursting of Bubbles across the globe. Especially when one examines the horrendous numbers coming out of its export sector, it is reasonable to presume that China is intertwined in the U.S. bust. Yet it’s my view that China is in fact a historic Bubble – and that it may have commenced what may prove a powerful new phase of inflationary excess.
It is commonly appreciated that China has about $2 TN in reserves to go with its population of 1.3 billion. This alone provides China unprecedented reflationary capabilities. China also maintains a tight relationship between its banking system and government policymakers, and it is worth noting that recent reports have Chinese bank lending posting another eye-opening month of expansion ($234bn!). China is also now aggressively using currency swaps and other financing mechanisms to drive exports and trade, especially in Asia. There is also increased talk of the Chinese government providing global vendor financing for its major industries, a potentially huge development from both China and global perspectives. Clearly, if Chinese industrial policy seeks to elevate the status of key domestic industries, current global tumult provides quite a rare opportunity to press decidedly ahead. Moreover, if China moves to develop its northern region as it has developed the south, there is really no bounds to the amount of “money” that could be spent.
On a short-term basis, the Chinese are (as always) fixated on maintaining social stability. As an analyst, I have to presume this is constructive to reflationary policymaking –especially considering the extraordinary nature of today’s global financial and economic risks. To what extent longer-term ambitions of global power and influence also work to spur near-term Chinese stimulus is more difficult to gauge. But until I see something to convince me otherwise, I will assume that today’s global backdrop provides China an opportunity to focus on - and move forward with - its long-term objectives. In the age of synchronized global stimulus, I don’t see why China wouldn’t “compete” fiercely in such endeavors as well. And I believe this dynamic could very well prove a powerful force in spurring global reflation. History may look back at this week’s G20 meeting in London as a key inflection point. The “Core” is in shambles, yet the surprising development may turn out to be the Periphery Rising (inflating). |
