Tuesday, June 16, 2009

Paul Samuelson: No one knows when recovery will happen

Just as the previous post attempted to highlight the perils and pitfalls of economic components, this one pushes a similar proposition, with one major exception. This time I can point you in the direction of a respected economist.

By now, everyone who is interested would know that China has been manufacturing everything that the U.S. and the rest of the world needs. For this effort, China has made a lot of money. This surplus is so huge that no bank can manage it. So, China put its "savings" into U.S. Treasury Bills, which are basically IOUs issued by a sovereign nation. Over the past many decades, U.S. Treasury Bills have been regarded as the best sovereign IOU anyone can get...until now?

There are many voices on this matter. The ones in the mainstream will tell us that economic recovery is just around the corner; that the U.S. economic malaise has bottomed out.

Worst of all, is the current faddish use of a horrible gardening metaphor, that green shoots are sprouting. I really can't stand that expression. It means nothing. It's nebulous and, therefore, entitles the maker of the statement to slip through any number of excuses when the forecast is found wanting...Oh! I meant the green shoots that are sprouting in the other economic sector, not this one. I think it's major BS!

The people who know are precise. The people who don't know just waffle. The usage of the expression green shoots is a reminder of the great Peter Seller's 1979 movie, Being There in that a simple-minded guy is feted for discussing gardening which was mistaken to be great pearls of economic and political insight. Needless to say that movie was political satire and great social commentary.

And, here we are. Paul Samuelson is concerned about the risk that China, which holds many American IOUs, will start balking at the myth that U.S. economic recovery is around the corner. That is when China may start selling down its American IOUs, an event that will trigger off a serious economic situation. Okay, enough build-up. Read Samuelson directly here. Or, read what I have extracted below. And, for the uninitiated, this is who Samuelson is, a mainstream economist, an economics textbook writer, no less, as anyone who has pretensions to have read economics should know.

China is the new important factor.

Up until now, China has been willing to hold her recycled resources in the form of lowest-yield U.S. Treasury bills. That's still good news. But almost certainly it cannot and will not last.

Some day -- maybe even soon -- China will turn pessimistic on the U.S. dollar.

That means lethal troubles for the future U.S. economy.

When a disorderly run against the dollar occurs, I believe a truly global financial panic is to be feared. China, Japan and Korea now hold dollars not because they think dollars will stay safe.

Why then? They do this primarily because that is a way that can prolong their export-led growth.

I am not alone in this paranoid future balance-of-payment fear.

Warren Buffett, for one, has turned protectionist. Alas, protectionism may well soon become more maligned.

President Obama struggles to support free trade. But as a canny centrist president, he will be very pressed to compromise.

And he will be under new chronic pressures. His experts should right now be making plans for America to become subordinate to China where world economic leadership is concerned.

The Obama team is a good one.

But will they act prudently to adjust to America's becoming the secondary global society?

In the chess game of geopolitics between now and 2050, much stormy weather will take place. Now is the time to prepare for what the future will likely be.


I should tip my hat to Mankiw's blog for having alerted me to Samuelson's views.


Anonymous said...

Hi BUMmy matey:

Here's Desi stealthily visiting to pluck this gem of a bloom off thy gardnern, but I see no lovely damsel sprinkling the flowers. Badder luck then in the sext steal of the nightie eh!:) Che3ers -- Desi will be at NPC along Jln Tangsi KL this friday evening from 7.30pm--come along for a short tehtari'? YL, Desi

de minimis said...

Hi Bro

I like the innuendoes :D

donplaypuks® said...

We have reached a stage in world economics and finance where even the experts, Samuelson, Krugman, Buffet et al have no clue about when recovery will happen.

The reason, in my opinion, is that rabid universal greed and growth measured by corpulent conspicuous consumption, have taken precedence over responsible capitalism.

It is my humble hypothesis that trade and finance must be based on real exchange of goods and services for there to be lasting global growth.

Speculative trading in forex, futures and artificial instruments like CDS are bound to create bubbles every 10 years or so (and should be completely banned), more so when fuelled by excessive gearing and printing of money.

This US obsession with being No.1 will kill us all. This is the only country in the world where there is no such thing as an honourable draw among opponents of equal strength, and World Championships can be about 2 teams playing in the domestic realm with no other countries participating!!

I mean China and India don't talk about being superpowers and dominating the world. They just go about quietly doing what's necessary to achive progress for their people.

The US will pay a heavy price for financial indiscipline with all these TB's held in huge quantities by China and Saudi and Russia. I read recently an article written by an American that Obama should crack the whip at China to support its suicidal TB casino economics. What arrogance!

I also think that India will come out of this downturn slightly quicker than China as their economy is not so skewed towards export. But the outsourcing biz in India will take a hit for sure, given that even Obama is cranking up protectionism. Yet again, one rule ("let the free market, invisible hand, millions acting neutrally")for others when you are doing well, and another when disaster is at your own doorstep!

Individuals need a balanced diet for good health and long-term survival. So too countries like China and India will have to plan for a more balanced economy than they have hitherto addressed.

And they don't need to be drawn into the stupid mind games of USA, UK and Britain; their domestic markets and economies can weather any storm created by the excesses and endemic greed of the Western world!