Wednesday, October 14, 2009

Read Wolf

The FT's Martin Wolf is always cogent, thoughtful, and (unlike this commentator) parsimonious with his words. No, I am not bucking for a dinner-party invite. But one should read - even if you might disagree - two of his two recent pieces, one a commentary on Fred Bersten's forthcoming article (hat-tip to JCK @ Alea), and second arguing why LibDem Shadow Chancellor Vince Cable's Mansion Tax proposal is right.


David Pearson said...


Wolf seems to think reserve status is the result of immaculately conceived policy choices between available currencies. In such a hypothetical contest, the dollar always wins hands down.

To mix metaphors, its not the destination that's in doubt, its the journey. Imagine China wants to proceed with mercantilist policies, but suffers from a nasty bit of export overcapacity and lack of external demand. What policy would result given political pressure over unemployment? Stimulating domestic demand is a viable option, but there's only one way to do that: make the Yuan overvalued (Brazil has done this time and again). The result would be a nice big consumption boom, and the resulting export-sector unemployment would be preferable to the alternative.

So if China runs a trade deficit, that would be nice for U.S. exports. The impact on interest rates is another story, as China would sell Treasuries to finance the deficit. What do you get when you combine high fiscal deficits and Chinese selling of Treasuries? A crash in the long bond? The Fed's reaction would be to step in to finance the deficits, all the while genuflecting to the output gap as the guarantor of low inflation. What is the probability of the U.S. maintaining reserve policy status conditional on the Fed's continued financing of structural fiscal deficits? Much lower that the non-conditional probability that Wolf conceives of.

Rantings of a dollar bear? Maybe. But if the starting assumption is, "the U.S. economy will not reach the escape velocity needed for self-sustaining growth", then much of this follows. This assumption is obviously not a certainty, but its at least likely enough to not be dismissed out of hand.

Manc Trader said...

Cassandra what did you think of his piece on "Narrow Banking"?

I personally would really like a world with less of this funny money nonsense.

I am happy to trade and make less in a world where there is less volatility induced by reckless monetary policies.

He was not as critical about this idea as I thought he would be.

Demetrius said...

Property Tax, by coincidence I posted on this on 24 September, in parallel. My take though was the fiscal situation, and the atrophy of the UK tax base demanding other tax sources. Other than than Wolf is probably along the right lines.

Anonymous said...

You are a bit of a windbag.
But you eventually make some sense.
Don't ever write an instruction manual!!