Martin Wolf must have an amazing research assistant …
from Follow the Money

Martin Wolf must have an amazing research assistant …

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Emerging Markets

Either that or he has a lot of time on his hands.

The powerpoint slides that accompany his John Hopkins lecture series on the Global Economy are amazing.  And not just because they are all shaded FT pink.

  • The first set covers financial flows to emerging economies and the crises of the past few years.
  • The second covers emerging market (and central) financing of the US current account deficit and the global savings glut/ investment drought.
  • The third covers Martin Wolf's policy recommendations - his suggests for changing the international financial system. 

Video and audio links can be found here as well.

Wolf thinks big, like Mervyn King and Larry Summers.    Geithner and Bernanke don't explicitly address the future of the "system," but they are also clearly thinking about how the US - and specifically US monetary policy - should respond to major changes in the global economy.

Wolf believes there is a savings glut.   Or a shortage of demand.  But he also doesn't think emerging markets should be financing of the US.    Or that world growth should depend on continued expansion of the already large US current account deficit.  So he wants change.

I generally agree with Martin Wolf's analysis of the current "conjuncture" and with his take on "what is to be done."   But even if you don't agree with his prescriptions, the data he has pulled together should lay the foundation for subsequent debate.

It is worth remembering that private markets want to finance current account deficits in emerging markets.   Private capital flows to emerging economies were never higher than in 2005, according to the IIF.   The pattern of international financial flows - poor countries financing rich countries, and one rich country in particular - isn't a market outcome.  Private funds are flowing into China, not out of it.  That is my objection to Caballero's analysis (with Farhi and Gourinchas).  China's banks and firms have not had any trouble creating financial assets that Chinese citizens and those with money outside China alike want to hold ...  

The Economist, for one, might want to take a look at Wolf's data before endorsing China's exchange rate regime.  Though I shouldn't tar all of the Economist's writers together - I suspect that their Economics and Finance team isn't completely of one mind on this question.

I particularly recommend slides 19 and 22 of Wolf's second slide show.   They show that China's savings surplus comes from rising business savings (profits on exports after the RMB fell?  Or rents on mining and resource production and real estate development?) and rising government savings, not growing household savings.   Business savings (and profits) up in the US as well - the savings deficit stems from falling household and government savings.    Slides 16, 17, 18, 20 and 21 show changes in the savings and investment balance of Europe, China, Emerging Asia - China, Oil producers and the US.    

Slides 39 and 40 are good too.  39 shows currency moves against the dollar since the end of 2002.  Japan and China have sat out the dollar's post .com bubble adjustment. 40 shows the enormous growth in the world's stock of reserves since 2000.

Slides 52-53 look at the US trade balance.  52 shows that since 1990, export growth has averaged 5.1% and import growth 8.3%.    53 shows that since 1990, exports have remained roughly constant as a share of GDP (actually that is true since 1980), while imports have increased by about 6% of GDP.   

Wolf's slide 53 highlights something I hadn't noticed before.  The expansion in the US trade deficit in the 1980s came because exports fell as a share of GDP; the expansion since 1990, however, stems from a rise in imports relative to GDP.   That isn't a good sign, in my books.  In the 1980s, the US has unused export capacity that could be brought back on line.   Right now, any rapid adjustment would most likely have to come through a fall in imports.   I don't think the US has the capital stock to export 15% of its GDP right now even if the dollar slid further -- and it almost goes without saying that investing in residential housing isn't the most obvious way to create new export revenues.

I liked Wolf's analysis of China as well - he argues that China not only has a large ($150b) current account surplus, but that it would have a $300b surplus if savings rates remained high while investment fall to a more reasonable level.   That strikes me as a real risk.   Wolf also argues that on its current path, China's reserves will hit $3000b by 2015 - a huge sum -- and that China is too big to export its way to Germany or Japanese income levels.   Exactly right.    See slides 11-13, 19-20 and 29 of Wolf's third presentation.

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