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andy xie on the FIRE economy, stagflation

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  • andy xie on the FIRE economy, stagflation

    Dress Rehearsal

    February 1, 2010

    By Andy Xie


    Chinafotopress
    The first decade of the 21st century ended with a near-death experience. But financial markets that collapsed in 2008 have roared back in the decade's closing year, with Time magazine naming Ben Bernanke "Man of the Year" for "saving" the American and global economies. The mood symbolizes the ‘free lunch forever'ethos of the decade-long party that crashed and burned, only to be bailed out to party again. Bernanke is viewed as a savior because no one wants to take responsibility for what happened and wishes Bernanke could erase the past.

    The magic ingredient for resuscitating the financial markets and the world economy has been trillions of dollars of bailouts. That money, not a better economic future, saved the financial markets. It has led to an emerging markets bubble that is supporting the global economy. It will take time for the money to become inflation, but when it does it will show the true cost of the crisis. With the world economy still not structured for another growth cycle, stagflation may stalk the world for a decade.

    The two decades following the fall of the Berlin Wall will be remembered as a gilded age. After the ideological struggle of the Cold War, the world embraced globalization and making money in any way possible. The pursuit of profit became the most powerful force shaping the world. Factories were moved to wherever wages and environmental standards were lowest. Local neighborhood shops were put out of business by superstores on the outskirts of towns. Wherever regulation stood in the way, deregulation took its place in the name of efficiency.

    This relentless cost-cutting has meant a rising share of income for capital and a declining one for labor. If this trend is left unchecked, deflation will follow to destroy returns for capital, as working consumers have less income to buy the abundant products that capital produces.

    Financial capitalism, though, extended the profits firms were making. By shifting capital into paper assets, it killed two birds with one stone. Workers could support their consumption by borrowing against asset appreciation, supporting the returns on productive assets. Capitalists could deploy their surpluses into paper assets, indirectly lending to consumers, rather than physical assets that would hamper returns. This happy combination continued to shift income from labor to capital. The boom laid the seeds for its own destruction. The capitalists were unknowingly paying for their profits by lending to consumers with overvalued paper assets as collateral.

    Two decades of income shifting to capital and asset inflation came to a halt last year when derivatives were exposed as frauds rather than ingenious designs that reduced risk to capitalists with no cost. The lower level of consumption in the future will significantly lower capital's returns. And without asset appreciation to supplement lower wages, workers will demand higher pay. Contrary to the popular belief that a weak economy means low inflation, the opposite will occur this time.

    The right response to this crisis would have been to nationalize failing financial institutions, restrict speculation with implicit or explicit government guaranteed funding, subsidize employment, and expand unemployment benefits. Capital mis-pricing is the root cause of the serial bubble phenomenon. Reforms that lead to the right pricing of capital would trigger real economic restructuring and lay the foundation for a new growth cycle.

    However, the "bubble establishment" had the clout to obtain government bailouts that saved their skins but cost taxpayers trillions. Taking advantage of the public panic in the crisis, they sold the story that only reviving the financial sector could stem the economic slide. It was a lie. Directly supporting the unemployed would have cost a fraction as much, while also stabilizing the economy. The remaining fiscal capacity could be used to support economic restructuring.

    This round of financial capitalism won't last. The lag between printing money and inflation may be long in the era of globalization, but it will come. China was a disinflationary force for a decade due to large quantities of surplus labor and over investment; American prices for manufactured goods declined to China's level through factory relocation. This process is over. China's prices are the world's; its production costs are sure to rise as manual labor dries up and land prices rise. China can no longer hold back inflation during a period of rapid monetary growth.

    Global inflation will begin to rise next year. Central banks may raise interest rates, but they will be behind the curve – rates will rise slower than inflation. At heart they will want to maintain loose monetary policies to help growth. Raising rates will be propaganda for cooling inflation expectations – fooling savers into holding onto depreciating bank deposits. But procrastinating about fighting inflation will only cause inflation to surge. By 2012, inflation might be high enough to cause public panic. Central banks will be forced to raise rates quickly, and a second financial collapse could follow.

    The world had a near-death experience in 2008. It may not be so lucky in 2012.

    http://www.cibmagazine.com.cn/Column...rehearsal.html

  • #2
    Re: andy xie on the FIRE economy, stagflation

    As I was reading this recent article by Andy Xie...
    A Change Of Mindset
    March 5, 2010
    By Andy Xie
    ...the following caught my attention...
    "...Japan has run up the national debt equal to 200% of GDP — the greatest Keynesian stimulus program in history — all in the name of stimulating the economy back to health. It has failed miserably. Japan's nominal GDP is about the same as when the stimulus began. Those who advocated the policy blame Japan's failure on either the stimulus being too small or not being sustained for long enough – that is, the dosage, not the medicine itself, was at fault.

    The bankruptcy of Japan Airlines is a sobering reminder of what is still wrong with Japan. It stayed with unprofitable routes for years without its creditors or shareholders being able to do anything about it. And by making credit cheap and easy, the stimulus prolonged the airline's business model — actually, an anti-business model — for a long time. Zombie companies that have first claims to resources have trapped the Japanese economy in stagnation for decades. The lack of shareholder rights has given the moribund companies the luxury of being able to disregard capital efficiency. The government stimulus has prolonged this inept business practice.

    What ails Japan is a lack of reforms, not stimulus. The prolonged and massive bailout has only allowed a bad situation to continue..."
    ...and I was reminded again of General Motors...which just happens to be in the news again recently...
    Fritz Henderson is back at GM, for $3,000 an hour

    February 23, 2010: 11:58 AM ET

    NEW YORK (Fortune) -- After resigning as president and CEO of General Motors in December, Fritz Henderson might have gone into hiding or decided to sit out the harsh Michigan winter on a Florida beach.

    Instead, here he is popping up again, this time as a consultant to GM on international operations at the very fancy fee of $59,090 a month for 20 hours of work a month...

    GM offers to keep 661 of rejected U.S. dealers

    DETROIT, March 5 (Reuters) - General Motors Co [GM.UL] has offered to keep open 661 of its U.S. dealers once targeted for closure as it tries to shore up sales after emerging from bankruptcy last year.

    GM once planned to terminate franchise agreements with about 1,300 U.S. dealers in a bid to operate its retail networks more efficiently and return the company to profitability...
    GM Names Russo Lead Director, Pays Girsky $5 Million

    March 5 (Bloomberg) -- General Motors Co. said Patricia Russo, the former Alcatel-Lucent chief executive officer who joined the automaker’s board last year, will become lead director...

    Now it's difficult to second-guess, from the outside, what is really going on in a large, complex company like General Motors. But the above are not good signs. Senior executives that are turfed out and then hired back as consultants is a classic sign of an internally corrupted and undisciplined corporate culture.

    Taking your eye off the restructuring plan and avoidance of executing the painful, but necessary decisions taken earlier is another sign that company lacks the leadership drive and determination to turn itself around.

    Finally, the elevation of Patricia Russo on the Board should give no comfort. I have nothing personal against Ms. Russo, but during her time at the helm of Lucent, she and her leadership team were chronically behind the curve trying to turn the company around. For years the market landscape for Lucent kept changing faster than the executive team and Board were willing to recognize and deal with. The solution? Merge Lucent with another telecom casualty, Alcatel...on the theory that two corpses improves the odds of a reawakening of the dead. This is simply not the sort of track record that's needed at General Motors at this time.

    Is GM going to be the US version of Japan Airlines? Time will tell...

    Comment


    • #3
      Re: andy xie on the FIRE economy, stagflation

      i think it was around 2005 or so when bill gross wrote a piece saying the u.s. was gm writ large: lots of off balance sheet unfunded pension and health liabilities dragging down its economic viability. i'm thinking the u.s. is STILL gm writ large. watch the bailout as it proceeds.

      Comment


      • #4
        Re: andy xie on the FIRE economy, stagflation

        I like Xie. Thanks for sharing jk.

        That quote was spot on:
        It will take time for the money to become inflation, but when it does it will show the true cost of the crisis.
        Last edited by LargoWinch; 03-07-10, 06:25 PM.

        Comment


        • #5
          Re: andy xie on the FIRE economy, stagflation

          However, the "bubble establishment" had the clout to obtain government bailouts that saved their skins but cost taxpayers trillions. Taking advantage of the public panic in the crisis, they sold the story that only reviving the financial sector could stem the economic slide. It was a lie.
          The "public" was not sold on the necessity of the bailouts, only the "public servants"

          Comment


          • #6
            Re: andy xie on the FIRE economy, stagflation

            The "public" was not sold on the necessity of the bailouts, only the "public servants"
            Only half true, because the so called public servants had been bought already so didn't need to be sold on anything.

            Comment


            • #7
              Re: andy xie on the FIRE economy, stagflation

              llanlad2, charliebrown: You need to run a spell-check: it's "public serpents".:mad:

              Comment


              • #8
                Re: andy xie on the FIRE economy, stagflation

                Originally posted by jk View Post
                i think it was around 2005 or so when bill gross wrote a piece saying the u.s. was gm writ large: lots of off balance sheet unfunded pension and health liabilities dragging down its economic viability. i'm thinking the u.s. is STILL gm writ large. watch the bailout as it proceeds.
                And I'm thinking you're correct.:cool:

                Thanks for posting anything by Andy Xie.

                Comment


                • #9
                  Re: andy xie on the FIRE economy, stagflation

                  Originally posted by Raz View Post
                  Thanks for posting anything by Andy Xie.
                  fyi, here are 2 places i periodically check to find xie's work. [perhaps there are others. if so, i'd like to know about them.]

                  http://english.caing.com/opinion/
                  http://www.cibmagazine.com.cn/Columnists/index.asp

                  Comment


                  • #10
                    Re: andy xie on the FIRE economy, stagflation

                    Originally posted by xie

                    This round of financial capitalism won't last. The lag between printing money and inflation may be long in the era of globalization, but it will come. China was a disinflationary force for a decade due to large quantities of surplus labor and over investment; American prices for manufactured goods declined to China's level through factory relocation. This process is over. China's prices are the world's; its production costs are sure to rise as manual labor dries up and land prices rise. China can no longer hold back inflation during a period of rapid monetary growth.

                    Global inflation will begin to rise next year. Central banks may raise interest rates, but they will be behind the curve – rates will rise slower than inflation. At heart they will want to maintain loose monetary policies to help growth. Raising rates will be propaganda for cooling inflation expectations – fooling savers into holding onto depreciating bank deposits. But procrastinating about fighting inflation will only cause inflation to surge. By 2012, inflation might be high enough to cause public panic. Central banks will be forced to raise rates quickly, and a second financial collapse could follow.


                    The world had a near-death experience in 2008. It may not be so lucky in 2012.
                    happened to stumble on this thread during a search. thought i'd quote xie's conclusions from early 2010. note that china just announced [official] inflation over 5%.

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