The household debt service ratio and the financial obligations ratio have also risen, but far more slowly and modestly than the ratio of household debt to disposable personal income would suggest: "Household Debt Service and Financial Obligations Ratios," <http://www.federalreserve.gov/releases/housedebt/>. What has kept the interest rates so low here (and consequently elsewhere, too), even as the US current account deficit has become larger than ever?
The doubling of the global labor force since the fall of state socialism and neoliberal capitalism, over all, but the three pillars of the American empire's finance are China,* Japan, and the Middle East.**
What makes them invest in the USA? It seems to me that it comes down to faith in the US Empire, past and present (past faith is important, too, because of high costs of transition for countries like Japan and China that have accumulated lots of dollar reserves), and absence of an alternative.
What sustains faith in the US empire? Is there anything other than US hegemony in the final instance backed by US military power? That is why Washington can't easily let go of Iraq, for defeat can erode the faith in the empire, though staying there longer can also erode it, too. What a double bind!
*
<blockquote><http://www.economist.com/business/globalexecutive/dialogue/displayStory.cfm?Story_id=4221685>
>From T-shirts to T-bonds
Jul 28th 2005
>From The Economist print edition
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Uniquely, China combines a vast supply of cheap labour with an economy that is (for its size) unusually open to the rest of the world, in terms of trade and foreign direct investment. The sum of its total exports and imports of goods and services amounts to around 75% of China's GDP; in Japan, India and Brazil the figure is 25-30% (see chart 2). As a result, the dragon's awakening is more traumatic for the rest of the world.
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China's impact on the world economy can best be understood as what economists call a "positive supply-side shock". Richard Freeman, an economist at Harvard University, reckons that the entry into the world economy of China, India and the former Soviet Union has, in effect, doubled the global labour force (China accounts for more than half of this increase). This has increased the world's potential growth rate, helped to hold down inflation and triggered changes in the relative prices of labour, capital, goods and assets.
The new entrants to the global economy brought with them little capital of economic value. So, with twice as many workers and little change in the size of the global capital stock, the ratio of global capital to labour has fallen by almost half in a matter of years: probably the biggest such shift in history. And, since this ratio determines the relative returns to labour and capital, it goes a long way to explain recent trends in wages and profits.
In America, Europe and Japan, the pace of growth in real wages has been unusually weak in recent years. Indeed, measured by the growth in income from employment, this is America's weakest recovery for decades. According to Stephen Roach, an economist at Morgan Stanley, American private-sector workers' total compensation (wages plus benefits) has risen by only 11% in real terms since November 2001, the trough of the recession, compared with an average gain of 17% over the equivalent period of the five previous recoveries (see chart 3). In most developed countries, average real wages have lagged well behind productivity gains.
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The flip side is that profits are grabbing a bigger slice of the cake (see chart 4). Last year, America's after-tax profits rose to their highest as a proportion of GDP for 75 years; the shares of profit in the euro area and Japan are also close to their highest for at least 25 years.
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China is already the world's biggest consumer of many commodities, such as aluminium, steel, copper and coal, and the second-biggest consumer of oil, so changes in Chinese demand have a big impact on world prices.
China has accounted for one-third of the increase in global oil demand since 2000 and so must bear some of the blame for higher oil prices. Likewise, if China's economy stumbles, then so will oil prices. However, with China's oil consumption per person still only one-fifteenth of that in America, it is inevitable that China's energy demands will grow over the years in step with its income.
There is currently only one car for every 70 people in China, against one car for every two Americans. That implies a huge increase in oil demand, which could keep prices high for the foreseeable future, because of scarce global spare capacity. China's consumption per person of raw materials, such as copper and aluminium, is also still low, so rising demand will continue to support commodity prices.
Overall, the upward pressure that Chinese imports of raw materials have put on the prices of oil and other commodities has been more than offset by the downward pressure of Chinese manufactured exports. As a result, another important aspect of the China effect is low inflation.
Central bankers like to take all the credit for the defeat of inflation, but China has given them a big helping hand in recent years. China's ability to produce more cheaply has pushed down the prices of many goods worldwide, as well as restraining wage pressures in developed economies. For instance, the average prices of shoes and clothing in America have fallen by 10% over the past ten years—a drop of 35% in real terms.
A study by Dresdner Kleinwort Wasserstein reckons that China has knocked almost a full percentage-point off America's inflation rate in recent years. The recent 2% revaluation of the yuan will probably be absorbed by Chinese manufacturers trimming their profit margins and so will not be passed on into export prices. But Americans calling for a 25-30% revaluation may come to regret it: the result would almost certainly be faster inflation.
As it is, China's reduction of inflationary pressures has allowed central banks to hold interest rates lower than they otherwise would be. Three and a half years into its recovery, America's real short-term interest rates are only 0.7%, almost two percentage-points below their average at the equivalent stage in previous recoveries since 1960. This is good news for borrowers, but some economists worry that the entry of China and other emerging countries into the global economy may have affected monetary policy in ways that central banks do not fully understand.
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Not only has China's disinflationary impact caused low short-term interest rates, but China is also partly responsible for the low level of long-term bond yields. To keep its exchange rate pegged to the dollar, China was the biggest buyer of American Treasury bonds over the past year. In the first six months of 2005, its foreign-exchange reserves increased by more than $100 billion, to $711 billion, of which about three-quarters are in dollars. This has also kept capital costs artificially low.
For many decades, global monetary policy has been set in Washington. When the Fed raised interest rates, global monetary conditions would tighten. Today, however, thanks in part to China's purchases of T-bonds, low long-term bond yields have offset the rise in American short-term interest rates over the past year. The yield on ten-year bonds is currently lower than before the Fed started to lift interest rates in June 2004. America's sovereignty over its monetary policy has therefore been eroded, with a given rise in short-term rates producing much less monetary tightening than in the past. To that extent, global monetary policy is increasingly being set in Beijing as well as in Washington.
By helping to hold down interest rates in rich economies, China may have indirectly created a global liquidity bubble. Total global liquidity last year rose at its fastest pace in three decades after adjusting for inflation. This excess liquidity has not pushed up conventional inflation (thanks to cheap Chinese clothes and computers), but instead it has inflated a series of asset-price bubbles around the world. Thus, pushing this argument to its limit, it could be said that the global housing boom is indirectly "made in China". Not only has China played a role in holding down short-term interest rates, but the People's Bank of China has also supported America's mortgage market by buying vast amounts of mortgage-backed securities.
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This article has argued that global inflation, interest rates, bond yields, house prices, wages, profits and commodity prices are now being increasingly driven by decisions in China. This could be the most profound economic change in the world for at least half a century. And its effect could last for another couple of decades. By some estimates, China has almost 200m underemployed workers in rural areas, and it could take at least two decades for them to be absorbed by industry. As this process takes place, it will continue to subdue wage growth and global inflation. Profit margins could also remain historically high for a period (though not for ever, as stockmarket valuations in many countries seem to imply).</blockquote>
** <blockquote><http://www.economist.com/finance/displaystory.cfm?story_id=5136281> Oil producers' surpluses
Recycling the petrodollars
Nov 10th 2005
>From The Economist print edition
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This year, oil exporters could haul in $700 billion from selling oil to foreigners. This includes not only the Organisation of Petroleum Exporting Countries (OPEC) but also Russia and Norway, the world's second- and third-biggest earners (see chart 1 below). The International Monetary Fund estimates that oil exporters' current-account surplus could reach $400 billion, more than four times as much as in 2002. In real terms, this is almost double their dollar surpluses in 1974 and 1980, after the twin oil-price shocks of the 1970s—when Russia's hard-currency exports were tiny. The combined current-account surplus of China and other Asian emerging economies is put at only $188 billion this year (see chart 2 below).
Relative to their economies, the oil producers' current-account surpluses are far bigger than China's. Whereas the IMF forecasts China's surplus to be about 6% of GDP this year, it predicts Saudi Arabia's—not much different in money terms, at just over $100 billion this year—to be a whopping 32%. On average, Middle East oil exporters are expected to have an average surplus of 25% of GDP. Russia might record 13% and Norway 18%.
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What will happen to all these petrodollars? In essence, they can be either spent or saved. Either way, a lot of the money can be recycled to oil-consuming economies and thus soften the impact on them of higher oil prices. If oil exporters spend their bonanza, they import more from other countries and thus help to maintain global demand. They are unlikely to spend the lot, however, because they tend to have higher saving rates than oil consumers: saving is around 40% of GDP in the United Arab Emirates (UAE) and Kuwait, for instance. A transfer of income from oil consumers to oil producers will therefore lead to a slowdown in global demand.
If they save their windfall, but invest it in global capital markets, they can finance oil importers' bigger current-account deficits—in effect, lending the increase in fuel bills back to consumers. And by increasing the demand for foreign financial assets, they can boost asset prices and push down bond yields in oil-importing countries. This in turn can help to support economic activity in these economies.
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So far most of the extra money is being saved, not spent, so where is it going? In the 1970s and early 1980s surplus petrodollars were largely deposited in banks in America or Europe. These banks then lent too many of them to oil-importing developing countries, sowing the seeds of Latin America's debt crisis. This time it is proving much harder to track the money, but much more seems to be going into foreign shares and bonds rather than into western banks. This may reflect a greater reluctance to hold deposits in foreign banks, because of the increase in official scrutiny after the terrorist attacks of September 11th 2001. Figures from the Bank for International Settlements (BIS) show that in 2002 and 2003 OPEC deposits with banks in the BIS reporting area actually fell. Since last year, they have increased, but only modestly. In contrast, Russian bank deposits abroad have risen much more sharply, as have the central bank's official reserves, from $73 billion at the end of 2003 to $161 billion this October.
Russian investment, whether in bank deposits, London property or football clubs, is relatively conspicuous. But even the experts at the IMF and the BIS are finding it hard to track Middle Eastern money, because a large chunk of the surplus is held not as official reserves, but as foreign investment by government oil stabilisation and investment funds and by national oil companies. Official reserves of Middle East oil exporters (including the total net foreign assets of the Saudi Arabia Monetary Agency) have risen by around $70 billion this year, accounting for less than 30% of their current-account surplus.
Follow the money
One puzzle is that, according to data published by America's Treasury Department, OPEC members' holdings of American government securities fell from $67 billion in January this year to $54 billion in August. But Middle East purchases of American securities are probably being channelled through London. Mr Khan reckons that although the bulk of OPEC's surplus revenues has so far gone into dollar-denominated assets, those assets are increasingly held outside the United States. A big chunk is also going into hedge funds and offshore financial institutions, which are unregulated and so impossible to track.
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Despite the lack of hard data, many economists are sure that a big dollop of petrodollars is going into American Treasury securities. If so, the recycling of money via bond markets could have very different effects on the world economy from the bank-mediated recycling of previous oil booms. If petrodollars not spent flow into global bond markets, they reduce bond yields and thus support consumer spending in oil-importing countries.
Indeed, this leads Stephen Jen, an economist at Morgan Stanley, to challenge the popular notion that Europe is being hurt less by higher oil prices than America. It is certainly true that Europe's exports to oil producers have risen faster than America's in recent years. Europe's share of OPEC's imports has climbed to 32%, compared with America's 8%. A recent report by ABN Amrofinds that while America's trade deficit with OPEC has grown markedly since 1999, the European Union's balance has barely changed (see chart 3).
On the other hand, around two-thirds of petrodollars are thought to have gone into dollar assets, pushing down American bond yields. In addition, America's economy is more sensitive to interest rates than that of the euro zone. Mr Jen therefore suggests that America may have gained more from lower interest rates than the euro area has from higher exports, especially because OPEC still buys less than 5% of the currency zone's exports. Although higher oil prices have increased America's current-account deficit, Mr Jen reckons that it probably runs a balance-of-payments surplus in oil, with capital inflows from exporting countries exceeding its net oil import bill.
How might the flow of oil money affect the dollar? Because oil is traded in dollars, rising prices initially increase the demand for greenbacks. But what happens next depends on whether oil producers buy dollar assets or swap their dollars for euros. Saudi Arabia, Kuwait, the UAE and most other Gulf states peg their currencies to the dollar, which might suggest that, like Asian central banks, they will continue to favour dollars. But unlike China's export surpluses, petrodollars are mostly not managed within official reserves, but by oil stabilisation funds and so forth. These are not subject to the same constraints as central banks to hold liquid assets and their aim is to maximise returns.
This means, says Mr Jen, that oil exporters' assets are more footloose than those of Asian central banks. So far, the bulk of petrodollars may have gone into relatively liquid dollar assets, helping to support the greenback this year. But this money could flit if the dollar starts to slide again. And there is lots of it: for example, the Abu Dhabi Investment Authority, with assets of maybe $250 billion, is one of the wealthiest players in global financial markets. Russia's central bank has reduced the share of dollars in its foreign reserves over the past couple of years, but it is still around 65%. The central bank has said that it wishes to hold more euros.
That leaves the dollar dangerously vulnerable. But what about the exchange-rate policies of the oil exporters themselves? Most oil exporters peg their currencies to the dollar or resist appreciation through heavy intervention, in much the same way as China and other Asian countries have done.
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By pegging their currencies to the dollar, these economies have in effect had to adopt America's monetary policy. With interest rates too low, excess domestic liquidity has stoked inflation and asset prices. The broad money supply of the Middle East oil exporters has grown by almost 24% in each of the past two years and the average inflation rate has risen to almost 9% this year. To curb inflation, Gulf economies need more flexible exchange rates and monetary policies.
Russia officially operates a "managed float" for its exchange rate. But the rouble's rate against the dollar has been held relatively steady over the past couple of years by heavy intervention. Consequent excess liquidity and a boom in domestic consumption have pushed inflation to 12%. . . . . . . . . . . . . . . . . . . . .
If oil prices remain high, so will oil exporters' surpluses. The IMF forecasts an average annual current-account surplus of $470 billion over the next five years (assuming an average oil price of $59 a barrel).</blockquote>
-- Yoshie <http://montages.blogspot.com/> <http://mrzine.org> <http://monthlyreview.org/>