Required Reading
Today’s Required Reading is Paul Krugman. Yes, Paul Krugman:
Alan Greenspan is expected to retire next year. The Bush administration, because of its nature, will have a hard time finding a successor.
One Fed chairman famously described his job as being to “take away the punch bowl just when the party gets going.” Bond and currency markets want monetary policy in the hands of someone who will say no to politicians. When a country’s central banker is suspected of having insufficient spine, the result is higher interest rates and a weaker currency.
Today it’s even more crucial than usual that the Fed chairman have the markets’ trust. The United States is running record budget and trade deficits, and the foreigners we depend on to cover those deficits are losing faith. According to yesterday’s Financial Times, central banks around the world have already started shifting into euros. If Mr. Greenspan is replaced with someone who looks like a partisan hack, capital will rush to the exits, the dollar will plunge, and interest rates will soar.
Forget the partisan sniping about Bush’s personality, and ask yourself: Who replaces Greenspan?
Fact of the matter is, thanks to this spendthrift Republican Congress (and its non-veto-pen-wielding Enabler-in-Chief in the Oval Office), Bush might just be painted into a corner. He’ll need a Fed Chairman who will publicly back his spending policies
(scratches head)
Can someone who remembers their Econ please explain to this poor stupid tech why this is a big deal?
Thanks in advance!
P.S. Stephen, I really like your blog!
Before Alan retires, let me be the first to propose that the years of his stewardship be formally called–you guessed it–the Green Span.
Fed Chairman Blues VodkaPundit writes
Fed Chairman Blues
VodkaPundit writes that, of all people, Paul Krugman is actually making some sense. Despite my initial fears that this was a sign of the Apocalypse, Krugman actually makes some sense.
China can’t dump dollars. Exporting so much as they do into the American economy means a huge flow of american dollars. They kill the dollar, they kill their own manufacturing industry. Like Japan they will do what they need to do to keep their currency weak relative to the dollar.
A mini-Greenspan? How about a mini-Ditka?
Bush might just move towards a fiscal disciplinarian, partly to put the onus of budget cuts (I can hope) on the Fed.
“The Bush administration, because of its nature, will have a hard time finding a successor.”
I hope you’re not buying Krugman’s characterization of the Bush admininstration.
Greenspan was a party hack during the Clinton administration. He manipulated the economy to help spin bubba’s numbers.
Stephen, be careful, you may get what you wish for. The country may not survive another Clinton style Ponzi scheme economy. Better you learn to live with that than hope for a return to the wild years.
I just wonder. Greenspan has been doing this for so long, I think it’s come to the point where people can’t imagine anyone else filling the position. He wil be the ruler by which every Fed chairman will be measured, and you know that nobody will measure up in most people’s eyes.
Financial markets like stability. They like predictability. Having to replace the Fed chairman is contrary to those two ideas… and no matter who goes into that position, people will be scared… because they won’t be sure what he’ll do.
A mini-me Greenspan would be about the only alternative… but since this isn’t an Austin Power’s movie… who would you suggest?
They’ll find someone. They were able to replace Paul Volcker, they’ll be able to replace Alan Greenspan.
Remember, the cemetaries are full of indispensible men.
Imagine? Why bother? Go rent the movie. Jane Fonda, Kris Kristofferson, 1981, _Rollover_.
About the most boring catastrophe possible.
All of a sudden the only thing you can buy with dollars are domestic products! Like food, housing, services … The horror!
Clothing becomes hideously expensive and we have to wear it out rather than change with the fashions. Oil prices soar and wells in Texas and Alaska (as well as shale conversion projects in Alberta) struggle to meet demands. Hi-tech progress stalls — software companies scramble to fix code to get more performance out of existing hardware rather than in anticipation of faster chips and bigger memories to come. Millions of retail employees — used to pumping products from China ports to US point-of-sale — lose jobs while US factories come out of mothballs and ramp up production. Federal Works Projects come back into fashion…
I mean, compared with a massive meteor strike off the New England coastline, a great volcano erupting from under Yellowstone, or suitcase nukes in the hands of Islamic/Columbian druglords and terrorists disrupting the Superbowl … the prospect of econo-conspirators dumping the dollar is frankly pretty low on my list or horrors.
Even lower than Fonda’s OTHER horror scenario, _The China Syndrome_.
Easiest way to spot a good central banker is to find out if the guy believes in a price rule. Stablest thing around is gold, tho not a perfect store of value. Someone who states that gold should trade at, say, $400/oz. would have instant credibility, and the dollar will remain the world’s reserve currency.
The people who attempt to keep ahold of the tail belonging to the tiger known as the several billion-strong population of China have an interest in ensuring that a billion young Chinese men do not have too much time on their hands. That doesn’t guarantee anything, but one does well to remember that political leaders in the U.S. aren’t the only ones with problems to deal with.
Are you really saying that the euro is more stable and certain than the US dollar? The recent battles of the smaller EU states to stop france and Germany from raising their debt level shows that not all is well in the euro-utopia. For your scenario to be true it would seem to me that there is nothing to stop China and the Saudis from doing it today, except that by doing so they would both ruin the one market in which both can sell into ( the US) and is, unlike europe, a growing healthy economy.
Degaulle once said “The cemetaries of the world are filled with formerly indispensible men”. We will miss Mr. Greenspan, but he can and will be replaced, and just like the great Volker before him,in a few years, we will wonder what the hubub was all aobut.
It seems to me that the euro is the new version of krugerrand.
I say hurray for the cheap dollar. We’re “wal-marting” the hell out of europe.
Dave is right. China would slit its own throat by collapsing the value of the dollar.
On Greenspan though, Bush is in a bad position no matter what. Greenspan has been built up to diety status, and it’s hard to imagine that anyone would be seen as an adequate replacement.
The media and the Democrats will roll out the same tired, predictable attack adgenda on whoever is nominated since Bush would never offer up the kind of commie-liberal they’re looking for. The stock market will be the real judge of the worthiness of Greenspan’s sucessor.
I saw this and went through the options at my blog. We need a respected economist, a winner of the John Bates Clark Medal, likely future Nobel Winner, an International Trade specialist would be good, one who already knows the markets, has a public profile. Found one.
This bit is a little problem:
“If Mr. Greenspan is replaced with someone who looks like a partisan hack, capital will rush to the exits, the dollar will plunge, and interest rates will soar.”
Other than that, Paul Krugman
Stephen,
Um, just to clear up, I’m not sure you understand how the Federal Reserve Board works.
1. The FRB has seven members. Greenspan is just one member of the Board. He happens to be the chairman, but all that really means is that he’s the one they send to Capital Hill to speak. He still has only one vote on the board, just like all the other members.
2. Like all members of the FRB, Greenspan was appointed for a single 14 year term. His began in 1992*, which means he’s not off the board until Dec. 31, 2006. Only Greenspan’s tenure as chairman is up, not his tenure as a board member. He’ll still be on the board (with the same number of votes – one) for a couple years to come.
* He actually started in ’87, finishing up a 14 year term for someone who retired, but like a Vice President who finishs out his President’s last year, this isn’t counted against him for term-limit purposes.
3. (not a Greenspan point) The central banks have moved (a bit) to Euros (Dollar investments still beat Euro ones 10:1), but the capital flows have remained the same. How is that possible? Private lenders have stepped into the fore and lent money hand over fist to the American economic machine. Why? That’s where the action is today, and where it will remain in the future.
So kick back a silver bullet, and relax.
Tim,
I wouldn’t worry about it. Krugman is only crazy in the New York Times. If you read his academic work (he teaches at Princeton), it’s much less frothy-at-the-mouth like.
Not that he’ll ever get appointed though. Bush doesn’t like it when people give him so much crap. Just look at Chirac.
Stephen,
Step back! Drop the mouse! Repeat, ” I refuse to believe anything that festering gob, Krugman spouts until proven.”
Let’s look at what Krugman says, ” When a country’s central banker is suspected of having insufficient spine, the result is higher interest rates and a weaker currency.”
Like when Carter was president and our deficit way lower, yet we had inflation nearing 10% and a stagnant economy?
“Bond and currency markets want monetary policy in the hands of someone who will say no to politicians.”
Like when Greenspan warned in 96 or 97 about the “irrational exuberance” in the stock market, only to be laughed at by the administration at the time? And have hints made by high placed officials that maybe he was beyond his prime.
Only the president can say no to the politicians, by using his veto pen. Only the voters can make the message clear to the politicians.
Think the voters are ready to cut some of the pork that pays for the vacation cottage on the lake, the second car, junior’s college tuition or that 42″ plasma screen? We get he government we deserve.
The FED gets pressure to raise or lower the prime rate, but he makes the decision independently. I agree it takes a man/woman of character. I agree he must command respect and trust.
I don’t see our economy collapsing, not based on the engineering, construction and trade periodicals I view. At least not in the near future anyway.
And suppose we did have some form of correction? A slowing of a twenty to thirty year run on the greatest increase in living standards anyone has ever seen? Think you’ll be relegated to a steady diet of government cheese, living in a van down by the river? I doubt it.
The future may not be all sunshine, but it’s not all darkness as Krugman relentlessly tries to make it out to be either. As for the next chairman of the FED, I strongly suspect there will be bipartisan consensus. Even politicians know enough to come together on this.
I don’t mean to cheerlead for this administration, but let’s give them a break, what the hell are the democrats offering that’s any better? Higher taxes, even more government spending? The MSM have been relentless in trying to find some way to scare the public, that has legs, can grow and will turn folks against this administration. Why didn’t anyone mention that the gov’t. ran a one-billion surplus in December?
Below is a small section from a report by the Bureau of Labor Statistics, looking at the employment outlook from 2002 – 2012. The paragraph pasted below deals with the trade defecit.
Nobody but nobody can predict the future, but based on their track record, I value what the BLS says far above anything Krugman has to say.
Anyway, without further ado…
“International trade.
The trade deficit has widened and the
current account deficit has deteriorated significantly since
1998. The U.S. trade deficit reached $424 billion or 4.1 percent
of GDP in 2002, a record in nominal dollars and as a percentage
of GDP. Slow economic growth abroad has continued to depress
the growth of U.S. exports, as the economies of many major
European countries are still struggling toward recovery and as
Japan lags behind U.S. growth. In addition, the drop in the U.S.
dollar since 2002 is still modest on a trade-weighted basis. In the
long run, the greatest uncertainty lies with potential export
growth, depending as it does on growth in the economies of
major U.S. trading partners in the European Community and in
the Pacific Rim countries. The dollar will have to depreciate
steadily against foreign currencies in order to keep the U.S.
current account deficit from growing too fast. Over the next
decade, the projection contemplates that the exchange rate will
drift downward over the projection period. A trade deficit in
goods will still exist throughout the entire projections, while a
surplus in services will continue to improve. (A detailed discussion
on exports and imports is described in the
Thanks Brock. You said it well. And you cleared up some misconceptions I had of exactly how the FED works.
What’s the deal with Krugman whining about the trade deficit? I have read his textbook on international economics, and several of his less academic works on the same subject, and he constantly tears into anyone who thinks the trade deficit is even relevant. Is it so awful now that it is overseen by the the grandmaster of evil, George W. Bush? Or is Krugman such a partisan hack that he is willing to contradict his own textbooks, solely to score some cheap political points?
Hey Paul, you have undeniably become what you used to refer to as a “policy entreprenuer.” Next time, at least read some of your own pre-1995 ramblings before you cry about the evils of W.
Krugman’s comment is on a par with the famous Pauline Kael “I don’t know how Nixon won, Nobody I know voted for him.”
The Republican party has never had a shortage of bankers with iron gray hair, impecable personal habits, precise conservative views, and unbending rectitude, who will replace Greenspan and go before Congress and testify at great length and say absolutely nothing just as Greenspan did. They will be less colorful than Greenspan, but what can you expect. Does anybody remember William McChesney Martin?
On the substantive issue, I am even less concerned. Not only are US deficits well within the parameters set by the past 40 years at 3.3% of GDP for the current fiscal year, but they are declining and they are very comparable to France and Germany and better than Japan. Not only that, but the US is the fastest growing economy of the G8.
I firmly believe that the trade deficit and the decline of the dollar vis-a-vis the euro and the yen is a reflection of the relative strength of the respective economies. Which set of problems would you rather have? 10% unemployment and 1% GDP growth or a trade deficit and a sinking dollar?
What’s the deal with Krugman whining about the trade deficit? I have read his textbook on international economics, and several of his less academic works on the same subject, and he constantly tears into anyone who thinks the trade deficit is even relevant.
Damned if I know.
With regards to the trade defecit, there are two immediately obvious ways to deal with it-
1) impose tariff barriers to make foreign goods more expensive
2) devalue the currency so that foreign goods become more expensive, which will make them less competitive, which will (hopefully) result in the trade defecit shrinking. This is basically the same thing as 1), but done in a somewhat more politically palatable way. I am of the opinion that this is also a bad thing overall.
This, of course, presumes that you think the trade defecit is significant.
I don’t- it’s one of the very, very few things that I (sometimes) agree with Krugman on. As the wise man once said, even a stopped clock is right twice a day…
Americans make America great not Fed Chairmen.
Opec and China would never trade dollars for the EURO; the EU has twice the unemployment, higher budget deficits, slower growth, and populations which are aging much faster (demographically).
If I want to read hysterically wrong sky-is-falling crap I can read the NYTIMES or any lefty blog.
I come to vodkapundit for some sanity – or i used to…
Volker was good, Greenspan is good, and Alan’s replacement will be just fine: running the fed is science, not voodoo; the fed chairman must be smart, not a magician. Greenspan wasn’t perfect. no one is.
bush will pcik someone who is just fine.
The trade deficit is a symptom of an overpriced dollar. The dollar’s high value relative to foreign currencies (particularly the Chinese Renminbi) means that it makes good economic sense to sell assets for dollars and use those dollars to buy goods. Americans, collectively, are saying “I’d rather have foreign goods than dollars at this price” and foreigners, collectively, are saying “I’d rather have dollars than our goods at this price”. This goes on until the foreigners (and Americans) decide they’re going to need more dollars to keep supplying goods. The resulting shift in price — the increase in the cost of foreign goods vs. American goods — represents a decline in the value of the dollar. This continues until we reach a point where Americans would rather have foreign currencies (and assets) than American goods and services at the new price. Newly “cheap” American goods become more attractive in foreign markets and foreign goods become less attractive in American markets (because they are more expensive). Thus, the current account deficit tips in the other direction: we start selling more goods and services abroad than we are buying from abroad. To pay for those goods, the foreigners start selling assets back to us. That continues, with the consequence being an appreciating dollar, and goes on until the world starts demanding higher prices relative to foreign currencies for U.S. goods and services and start dumping foreign currencies in favor of dollar-denominated assets, at which time the cycle begins to go the other way again, and imports become more attractive due to price, and we begin to run a trade deficit again.
In other countries with smaller domestic markets for goods where imports make up a greater share of economic activity, a declining currency can kick off some ugly inflation. Doesn’t happen in the U.S., much, since we have a more than sufficient supply of domestic goods to replace the (soon to be overpriced) imports.
Bottom line: for the United States, a “current account deficit” does not matter, and a declining dollar does not matter.
Hmm, I wonder how much of this is sour grapes? I mean, noted “economist” (I have yet to see anything intelligent he’s written on the topic) and loyal leftie Krugman was probably angling for a nice little appointment in the Kerry Administration.
Now he’s still a partisan hack for an out-of-power party at a fallen newspaper. Can you blame him for being bitter?
Brock,
Well aware of Krugman
The trade deficit is a symptom of an overpriced dollar. The dollar’s high value relative to foreign currencies (particularly the Chinese Renminbi) [...]
Keep in mind the Chinese have pegged the value of their currency to the USD, and intervene as needed to maintain that target price- it does not float.
If D(M)r. Greenspan is replaced with someone who looks like a partisan hack, capital will rush to the exits, the dollar will plunge, and interest rates will soar.
That determination is very subjective, In 1978 most of the MSM did not think Volker was a hack but under his direction inflation and interest rates continued to rise – until the Reagan tax cuts of 1981 when they started a long decline and the $ started back up. Volker talked tough but was basically and “easy money” go along with Carter man. The MSM was completely wrong in their characterization of him.
But the Fincial markets figured him out in less than six months.
To the detriment of American Stock and bond markets and the unemployment rate.
The reason for the long preambel is that Krugman (who does not even know Greenspans title!) will lable anyone Bush appoints as a hack. The MSM will also likely use a similar label. No mater what his label the world markets will sort it all out in six months or less.
Dr. Greenspan has been the best Chm ever. Mitchell ( the Dr. of Krugman’s quote) was good but not close to Al. The world will miss him.
Krugman economics: From science, to art, to artiface, to rap music?
One word:
Thomas Sowell
China would not dare intentionally damage the U.S. economy. America is its largest foreign market and we Americans might just stop buying things made in China.
If capital rushes to the exits, who will buy those Tresury Notes from the Social Security Trust Fund ?
It becomes like there is no trust fund.
Social Security Trust Fund?
What social security trust fund?
What they call the social security trust fund is a hoax based on the idea that if I take $20 out of my pocket, replace it with a $20 IOU, and then spend the $20, I still have $20 worth of IOU.
The ‘Social Security Trust Fund’ is a bad joke.
“Doesn’t happen in the U.S., much, since we have a more than sufficient supply of domestic goods to replace the (soon to be overpriced) imports.”
-Generally agree, except for that black gooey stuff. The US cannot produce enough, and the cost of that will rise. Of course, the cost has already risen, especially in dollar terms, and it isn’t good for the economy. That said, the economy is still strong enough to take the hit and keep going.
Of course, everyone has problems – look at Canada – a budget surplus (achieved the Democrat way, through ruthless over-taxation and starving the military) and a hefty trade surplus are leading to a rapidly appreciating currency (vis a vis the US). This in turn is starting to make Canadian goods a bit pricey for its largest export market (USA – +/-80% of Canadian exports). This is leading to a slowing economy, which will soon result in job losses (Canada is lucky when it’s unemployment rate gets within 3 points of the US rate anyway), followed by lower interest rates and a falling currency. As sales of manufactured goods to the US decline, oil and other energy products will become an ever-greater proportion of Canadian exports – which produces a good-looking trade surplus, but relatively few jobs outside Alberta and Newfoundland. Basically they’re headed to 10%+ unemplyment again.
Yeah, the US economy has some problems, but they’re problems the rest of the West would be damned lucky to have.