Macro runs out of gas on food and energy inflation

I spent last week with some friends and they were kind enough to enlighten me about inflation. Since this is a mostly a macro blog and since I usually have my macro hat on, my first instinct is macro. So when discussions of inflation kick up I am ready with my tried and true macro approach:

·         Fiscal policy as measured by government deficits has no more than short-term impacts on inflation

·         Monetary Policy is the main macro tool to cause or stop future inflation

·         Inflation refers to changes in the whole body of prices and not just specific commodities like food or energy

·         Measures that best predict future inflation – like core or median inflation – usually ignore the behavior of erratic and highly fluctuating elements like food and energy prices

·         The conclusion is that macro policymakers at the Fed ought to carefully watch the whole structure of prices and not be too quick on the draw when they see food and energy prices rising.

That is where I would usually stop – time for a JD with a few cubes.

But is appears that the macro story isn’t enough right now. And I am beginning to see why. My friend first pointed out that despite relatively low inflation rates, real people are being hurt.  Lower income people are hurt more than others when food and energy prices rise because food and energy commands a larger share of their income. They don’t care if this decrease in buying power is called macro inflation or relative price change. They want someone to do something about it. This is as true in China as it is in the USA.

So if macro policy isn’t designed to effectively halt food and energy inflation, then what is? Second, if these policies take time to have their full impacts, it is first important to determine if this food and energy inflation is going to continue on. It makes no sense to put in a major new policy or set of policies if the inflation is going to vanish before the impacts of the policies hit. This is often the case – temporary supply factors often disrupt food and energy markets and the impacts are gone almost as fast as they came.  Third, if monetary and fiscal policies are not called for, then we need to decide what sort of policy should be used.

Judging from recent changes it looks like food and energy might keep up the rapid pace.  While the overall index for the price of food did not rise faster than the overall CPI in the last year, there were some key food sub components (meats, dairy, and oil) that did. Energy is another story, however, rising at more than 21% in the last year led by increases in gasoline and oil. The critical question is whether or not these increases will repeat or worsen. Here is where the sector experts – not macro experts – have to contribute to the policy discussion.  Experts can help us form opinions about the persistence and causes of these changes.

What are the key stories? China is usually in the middle. China uses more food and raw materials that it can produce. Other developing countries do the same. Thus an important part of the inflation story comes from world supply and demand. The Arab Spring is a wild card thrown into the equation. With less oil coming out of Libya, oil prices quickly rose. OPEC is in disarray and one can only wonder how Middle East oil producers will act in the future as the revolutions spread. While world oil and US gasoline prices have fallen from recent highs, it is hard to be optimistic that the next political upheaval in the Middle East won’t bring a repeat of oil prices above $100 per barrel. 

This blog is no place to start listing all the factors that impact food and energy prices. The discussion above, however, is meant to remind us that changes in these prices are often subject to very temporary factors and/or derive from sources that are beyond the control of the US government. This is not to say that there are no US policies that could help. But it does underscore the limits of policies.  President Nixon’s infamous Wage and Price Controls (1971 to 1974) are a case in point. Nixon was exasperated with what appeared to be permanent increases in the inflation rates in the early 1970s and it appeared that food and energy were catapulting increases in the prices of most goods and services. So a great believer in the free market, Nixon startled a whole nation by imposing the most un-capitalist policy he could have tried – literal government control over most wages and prices. He created a mess and later the controls ended in failure as another round of increased energy prices could not be held back. This policy example reminds us of the Dutch boy with his finger in the dike.

The policy message of this post is not very agreeable. People are hurting because of increases in food and energy prices. To the extent that these changes will continue in the future there is a case to be made for some sort of policy solution. But the causes of these increases tend to be mostly out of the reach of domestic policies and there is little history of good policy designed to quickly control the prices of food and energy.  Given the current “rock and hard place” macro situation there is a little hope that a macro anti-inflation policy will be introduced in the USA any time soon. If anything, policymakers seem more likely to create or sustain unprecedented stimulus which will only fan the flames of inflation of all goods and services.

If the government is not going to save us from inflation, then what can we do? The most obvious answer is to shop well. Some purchases can be postponed even if we don’t want to wait for them. The items that must be purchased usually offer choices. One can sometimes buy less or perhaps find substitutes.  True, the substitutes might not be as desirable as the usual goods we buy but during such a time we may not have better alternatives. Maybe some people will have to get help from friends of families. I think you get my point and you are probably not very happy about it. But sometimes life really stinks and sometimes there isn’t much we can do about it. At those times our mental well-being is often best served by turning lemons into lemonade. Sure, you can always push harder on our policymakers but be careful what you wish for.  

More Economic Stimulus Now?

Suppose Charlie got into a wreck with his car and was seriously injured. Let’s suppose he had multiple internal injuries that were very painful.

The emergency technicians gave Charlie some pain killers and sped him off to a hospital where he was attended to by some famous physicians. The medical team knew the sources of the injuries were in the abdomen but they were not positive about the exact nature of the internal injuries. So they decided to operate.

As sometimes happens, the operation produced more than one theory about the best course of action. It seems that more than one organ was injured and plans to improve one trouble spot would greatly irritate another. They sewed Charlie back up, gave him some pain medicine to deal with the ramifications of the surgery and decided to wait and see for a while.

Dr. Mean, a nationally known kidney specialist noted to Charlie and his family that the patient was in really bad shape but was lucky to have such a prominent practitioner on his case. Dr.  Nice, a recent winner of the Best Liver Surgeon in Alabama Award took pictures with the family while he administered another round of pain medicine to Charlie. Drs Nice and Mean quibbled about the best way to proceed and made sure that Charlie had plenty of medicine to carry him through as they ordered test after test to measure the pace of Charlie’s healing.  Meanwhile the famous doctors went to their respective annual conventions and made stirring oratories about their latest contributions to vanquishing kidneys and livers.

Thankfully the medicine did get Charlie through the worst of the pain and he was able to walk and pinch nurses with that usual Charlie sparkle in his eye. Natural healing was taking place but it was clear that Charlie would never again hurdle fences or otherwise run from the police. Drs Nice and Mean were having daily meetings at the local pub discussing fervently the best approach to Charlie’s health issues but had still not hit on an approach that would deal with all the internal issues.

They did notice that Charlie was started to slur his words (more than usual) and they concluded that he might need a different pain medicine.  So they prescribed another one. Of course there was some debate about which drug might work best but eventually the doctors agreed on a new one. Charlie was happy enough but it was a little frustrating. The medicine made him want to dance with the nurses but unfortunately his internal injuries wouldn’t really allow for anything much beyond a one-minute polka.

Okay – this is getting a little tiresome and tedious right? But come on – is it not exactly the stupid story our politicians are telling us? Our great sage of the Fed notices that the economy is not running full tilt and tells us that we need to keep up the stimulus – unprecedented levels of stimulus. But has the Fed, the Congress or anyone else really attended to what caused the recession of 2008/2009? I don’t think so.  So they want to keep the I-V going as they and the rest of government avoid the real causes of our economic problems. The President says “be patient” and predicts that we will soon emerge from this temporary hiatus in growth. But he has done next to nothing to create real belief that some particular remedy is working.   

Have they spent the four years devising a solution that stops financial institutions from giving mortgages to people who cannot afford them? Have they effectively legislated actions that would prevent huge financial institutions from taking excessive risks behind closed doors? Have they done anything to even remotely encourage hedge funds to go back to hedging? Have they done one thing to prevent the government from having another half century of virtually back-to-back budget deficits? Have they really extinguished the factors that contribute to double-digit increases in health care costs? Have they made businesses be more flexible and competitive?

But you might argue – they have begun the process. They put in a stimulus program and lots of committees are dealing with new regulations. They know that it is time for the stimulus to end but some experts worry that we have to wait until the recovery is more solid.

Pasha! Give me another dose of pain medicine! This reminds me of the “old take-off the band-aid controversy.”  Should you take it off fast or do you take it off slow? With a quick rip you get an intense ripple of pain and then it is over. Imagine pulling off a large band-aid over the course of a couple of years. You get a little bit of pain each day for a long time. Perhaps you hope that over all that time some miraculous invention will intercede and the band-aid will just fall off without pain. But this approach guarantees nothing but pain and more pain. We would be in much better shape if the government had moved more quickly with some real remedies. Yet even today some say that there is no urgency. Harry Reid said the other day that there was no emergency to reduce the government deficits and debt.  He sees no problems on the horizon. PLEASE HARRY – stop the drugs and pull that damn band-aid off!

I know you can add to my list of diseased organs – troubled organs that our economic doctors continue to ignore over and over.  But whether or not you can agree on the size of the list, it seems easier for them to pump us full of pain medicine than to focus on real remedies. We are the patients and we seem completely addled by the drugs. So we shuffle our feet on the way to the bar and let them get away with it. And then we almost clap when things get worse and they order another round. Thank goodness our good doctors are treating pain! Unfortunately world investors are catching on to our game.  At some point even the pain medicine won’t do much good. Greece must now pay its creditors 30% for its loans. Perhaps we should think about this for a while as we sip our Greek coffees with a shot of Ouzo. 

Healthcare and Physics Are Not Simple

Make it simple. Make it short and simple. These are words of advice that I take to heart. A blog or for that matter almost any communication needs to have a purpose and be effective or it is not worth doing. When 

Betty says – Larry take out of the garbage – there is no mistaking what she means.

Those of you who read this blog know that I struggle with short and simple and I know I can improve. But this posting is all about why I sometimes rebel against such advice and think perhaps the extreme form of it illustrates why our country is in such a pickle. Some things aren’t simple and attempts to make them seem easy don’t help.

Let’s start by admitting that not everything is simple. No matter how many times you try, you cannot make physics easy. When I was an undergraduate at Georgia Tech majoring in Industrial Management in the 1960s, I was required to take one course in physics. To be honest, we IM majors were required to take “Cookbook Physics” from a professor who specialized in dumbing-down the real physics into something understandable by 18 year-old party boys.  But even Cookbook Physics was too hard for most of us and we were lucky to have a tutor named EE Bortell. I owe Prof. Bortell much.

It is true that most of us generally understand the meaning of “what goes up must come down” but it is also true that we really do not fully understand the law of gravity. Apparently there is a giant sucking machine somewhere in the center of the earth that helps keep our feet on the ground at least until we drink that last JD of the evening and try to moon walk across a floor with a six inch orange shag carpet. When it comes to designing and building airplanes, my hope is that the engineers at Boeing know a little more than “What goes up must come down.” That is, I hope they studied aeronautics, mechanical engineering, and whatever else it takes to really understand how to get us safely from point A to point B.

These studies take time and involve mastering many concepts, theories, history, Michelangelo’s David, and other considerations. If two Boeing engineers want to argue about the best way to design the newest aircraft, I doubt that most of us who have not studied these subjects for thousands of hours would really understand the arguments. We might listen attentively for words like crash or extra rare steak – but we really don’t have the background to effectively decide which engineer is right and which one is wrong. We would hope that experts would make the decisions and our role would be to buy tickets, fly business class, have our luggage lost, and go to someplace really nice in Italy.

Imagine how the tone of all this might change if we normal human beings were asked to adjudicate or vote on all Boeing technical decisions! Imagine that Boeing didn’t really care about having the best airplanes in the world – they just wanted to get public acceptance or love and approval. To get your vote, Boeing Engineer 1 shows you vivid detailed color pictures of crash victims and explains that his opponent’s system might lead to faster aircraft but with a much higher risk of system failure. Engineer 2 shows you getting off the plane in Italy (did I mention our vacation in Italy?) two hours after leaving New York and shows you eating pasta, making business deals with gondola drivers, and otherwise saying things like guten journo and merciprego.

You laugh but whether it is a debate about Medicare or government budgeting issues, most of us don’t know squat about these things and our elected representatives and friends in the press treat us like idiots. Perhaps they are the idiots but for the sake of this argument it doesn’t really matter.  Medicare or healthcare policy in general offers great examples. To REALLY understand the issues in healthcare you ought to at least understand the roles played by everyone in the value chain – nurses, doctors, hospital administrators, medical device and pharmaceutical companies, insurance companies, and Dr. House. You also need to have some understanding of how technological, legal, economic, and other trends and changes are impacting decisions of these entities. Of course, you also need to understand the motivations and actions of people who demand healthcare and the role government plays in impacting their decisions. That’s a lot to master for the average person who thinks that Australia is a US state and who can barely turn on his TV without the help of a 14 year old grandchild.

Like decisions at Boeing these decisions about healthcare are not simple and are not easy to explain as we normals debate the best systems. So what we get are watered down and dramatic oversimplifications which have very little to do with the real issues and everything to do with scoring votes –

o   Death squads will murder your Uncle Bob

o   Republicans will push Grandma Betty over the cliff

o   Pharmaceutical companies only care about making money and make huge, obscene profits

o   Government is needed to protect people from companies

o   Companies are needed to protect people from government

It really isn’t about any of those points. There is a belief that the US should have a healthcare system that includes everyone. So benefits have been extended to nearly the whole population. Before this legislation was passed, costs were rising at unsustainable rates and creating challenges for the system’s viability. Adding millions more people has the potential to constrain these cost increases but much of the new healthcare program does not seriously and convincingly get the job done. Thus we are left with a plan that could add to the bankruptcy of a nation already on the verge of financial breakdown! No plan that includes both widespread inclusion and cost control is going to make everyone happy. Someone is going to have to lose something. This is not easy stuff. Where is EE Bortell when you need him?

I think you get my drift. Most of us don’t really know anything about designing a healthcare system for 300+ million people but when some of the “experts” tell us colorful and outrageous things we either (1) nod and acknowledge the opinions of the experts we like (from our political party) or (2) we hoot, holler, and ridicule those we don’t like (in the other party).

This is no way to get to the moon and it clearly is no way to design a decent healthcare system or balance our ballooning national budget.

Isn’t it weird how we let politics determine so much of what impacts us? Imagine if we had to get a majority of politicians to help us decide things like: the best way to drive from our house to our favorite restaurant; whether to select Android over Apple; if our children will play soccer or piano; and so on. The point is that many decisions SHOULD NOT be determined by the political implications – they SHOULD BE determined by the specific merits of the arguments.

So if this makes sense for most of the things we do every day – why does it not make sense for other important things like healthcare and budget balancing? Why don’t we just say – Harry, lighten up and do what is best for the country.  Duke it out all you want but eventually get Jim and some real experts into a room and don’t come out until you have compromised on a decent solution. Tell all those fringe folks to take a hike.  I know it takes some real cajunas to stand up to those squeaky wheels but in the end you probably don’t need them anyway.  In our jobs and families most of us have to use logic over passion when making decisions. Why are we so docile about requiring the same of our politicians? 

Jeopardy, US Debt, and funny cigarettes

Jeopardy is the hazard or risk of or exposure to loss, harm, death, or injury.

Jeopardy is always around us – and thankfully we have loved ones who seem to never cease to remind us of it:

·         If you keep playing basketball someday your knees are going to give out

·         If you keep drinking wine like that your liver is going to explode

·         If you keep eating corndogs you are going to turn into one

·         If you keep spending more than you earn you are going to get into trouble

·         If you keep smoking those funny cigarettes, then you may get to visit the hokey pokey

As the definition and the above brilliant examples suggest, some decisions or actions you take can have negative consequences. When we are young or otherwise foolish, we tend to engage in these actions with relish and try not to think about the consequences.

It is useful to point out that many actions and decisions do not involve this kind of jeopardy. We invest money at the peril of losing it. We take one job instead of another. We take calculated risks all the time knowing that there is some chance that we might be negatively impacted. But this post on jeopardy is not about those kinds of risks – jeopardy is about an almost sure negative thing. It is about a current pleasure or habit that interferes with better judgment. Jeopardy means that the negative consequence has not yet arrived – but it is clearly on the horizon.

Think about the recent housing and stock market bubbles that proceeded the last recession. Most people knew that the bubble was going to burst but they kept buying anyway – they were having too much fun making money. That fun got into the way of logic. We told ourselves that the bubble would come later…always later.

This is exactly what we have been doing with respect to government deficits and debts since the time the baby boomers were old enough to smoke those funny cigarettes. We all know the data – except for a few fleeting government surpluses during the Clinton presidency the US government has been racking up deficits since the boomers first starting doing the twist in the basement to the sounds of Chubby Checker.

One doesn’t have to be an economic historian to know that economists and others have repeatedly warned over all these decades that such behavior had to stop. But government spending is like a drug. You can never get enough of it. There will always be less-fortunate people to help or bad guys to police. There is no end to the list of groups that “need” help. Such helping leads to votes and votes mean power. It is a simple equation. The people who receive the benefits feel them deeply but when you divide the bill among enough people they hardly notice it. It is an easy game for politicians to play. Being against helping makes you seem hard and cruel.

So what puts an end to this process? I don’t really know. There seems to be no end to the jeopardy. I haven’t said much about the private side of the debt but we all saw the negative consequences of too much spending and too much borrowing by the private sector. The last recession was alarming. Because the government was already in hock it had to go even deeper into debt. Great economic minds with a long list of prestigious prizes dangling around their educated necks spoke with united voices that we must have EVEN MORE GOVERNMENT DEBT to solve the alarming economic problem.  

They convinced us to add trillions of dollars in debt, equating this to a magical pill or drug that would produce marvelous restorative effects. And like drugs and unlike real remedies the magic potions kept us high for a little while until the effects of the drugs wore off.  To summarize so far:

·         Decades of government debt increases put us in a precarious position

·         At least a decade of private sector debt increases led to a financial collapse

·         Almost four years of unprecedented increases in government debt now threaten to lead to a second recession.

So in the Saturday edition of the Financial Times:

·         The headline on the front page says “Jobs data stoke US recovery fears”

·         On Page 6 the top editorial “Dealing with the evils of stagflation” concludes with these words, “The real peril now is double-dip recession rather than inflation. This is no time for tightening.”

·         On Page 7 the lead comment titled “Apologies – we need a toxic rethink on the economy” ends with this advice “Let us hope that no more stimulus is needed. But that option cannot be taboo.”

Sorry to say this but “BULL CRAP!” is about all I can say. Honey quit hitting your head against the stone wall. But Mom, it feels really good. Honey it will put a dent in your head. Mom, can I do it one more time?

They never give up.

So what are we supposed to do? Let’s review. Too much debt, whether by the private or public sectors, got us into a mess. Yet there is a loud and well-educated howl to do even more of it. If we do even more, then the jeopardy stakes rise even more. Doing even more debt puts us in an even more precarious position down the road. As the next round of stimulus starts to wane and the economy slows threatening a triple-dip – will these same people ask for even more debt?

If we do the obvious and prudent thing we will find ways NOW to stop the growth of debt – and then reverse it. But some argue that the country is like a drug addict in the hospital with a heart problem – if we remove the drug too quickly it might kill the patient. I can understand that.  I can go along with that.

But let’s be clear. That doesn’t mean that we give the patient more drugs. It does not mean that we stand frozen in the face of fear. What it does mean is:

·         We quit playing games and recognize that the source of our country’s most pressing problem is too much debt. Too much debt is public enemy #1.

·         We focus our policy work on this and only this policy issue and not play political games with hot button issues until we are done with public enemy number 1.

·         Recognize that past jeopardy has put us between the proverbial rock and hard place – there is no way to exit this situation without severe repercussions.

·         Those negative impacts are large and will be with us for a long enough time that everyone will have to share them.

·         And that it is very possible that while we legislate the policies TODAY, the implementation and the beneficial impacts will come GRADUALLY.

·         For gradual policies to be effective it is critical that they not be easily reversible. Attention must be paid to making sure that these policies cannot be changed in coming years.

Finally we have to recognize that government or private credit is a drug and we have not been very good at managing its use. A realist recognizes that government isn’t going to go away and the Federal government is probably never going to be much smaller than the 20% of the economy it achieved over the last half century. But keeping it near 20% is not going to be easy as the interest burden of the debt doubles and triples, as the population ages, and terrorism grows.

We cannot continue to beat our collective head against the wall. It is time for some common sense. A gyros is tasty but if we aren’t careful we may soon be more like Greece than we really want to be.

Global Inflation – It takes 150 to Tango.

The US inflates the money supply leading to a trade deficit. This alone should cause the value of the dollar to depreciate relative to the currency values of its trading partners. Because the dollar flows abroad and because the dollar is the world’s reserve currency, other countries hold these extra dollars – doing so by buying dollar assets. This pressure keeps the value of the dollar stronger than it ought to be and raises the value of US bonds, stocks, and other assets. It also puts downward pressure on the currencies of US trading partners and leads to inflation in those countries. When we import goods from those countries, we also import inflation. It is a long and treacherous global circuit but it shows that what goes around comes around – that is, inflation of US money causes inflation of prices in the USA.

The above scenario was borrowed (I hope correctly) from an article in the Wall Street Journal on May 24, 2011 by Ronald McKinnon called “Return of Stagflation.”    http://online.wsj.com/article/SB10001424052702304066504576341211971664684.html

I fully concur with Professor McKinnon’s assessment that inflation is around the corner if not already on our door steps. But I think that not enough responsibility or blame is assigned to US trading partners for the transmission of inflation and the occurrence of stagflation. Yes, the US is culpable but his analysis and policy advice is incomplete because it minimizes the roles played by our trading partners and especially the so-called transforming nations. 

It is true that too much money creation in the US causes inflation in the US and the solution involves a reversal of US monetary policy. But while US monetary policy is not helping to control world inflation it is also true that the policies of other countries do little to deal with world inflation either.  Let’s call these other countries co-conspirators or at least enablers.

What is wrong with the discussion of the first paragraph is that it treats foreign countries like robots – or like Pavlov’s famous dog that predictably salivated when a bell was rung. In fact many of the trading partners of the US are more like mean dogs that bite when the bell rings (and when it doesn’t)!  A distinctive common goal among many developing countries is that they pursue economic growth through exports. Anything that might cause their currency values to appreciate could do harm to this goal and they react with policies that offset the appreciations. That means increasing their money supply – either domestically by buying domestic bonds or internationally by buying foreign currencies. If it is the US that is causing their currencies to appreciate they would buy dollars. If it was Europe causing them headaches they would buy euros. If it was Brazil leading to currency appreciation, the offended countries would buy reals.

Let’s suppose a country – let’s call it Kirstia-Allia – found its currency (ThePretty) rising and thereby threatening its exports of dancing shoes and tutus – reacted to this attack by buying euros. This market action would normally push the value of ThePretty downward and viola save the day. This action also increases the supply of The Pretty. Of course, Kirstia Allia, has other options. Each option below has its own impacts on Kirstia-Allia and the world. Which one is most desirable to a transforming nation depends on its own economic situation and goals. But clearly this list shows that Kirstia-Allia does have control over its money supply and does NOT have to transmit inflation generated by any another country:

·         Recognize that exchange rates are not the only factor affecting their exports and not worry about the currency appreciation. Sales might remain strong despite the appreciating currency

·         Recognize that it might be more effective to sustain exports through policies that made their products more competitive – through lower national inflation or subsidies/tax schemes designed to enhance global competitiveness

·         Recognize that rising exchange rates may be beneficial in ways that might be more important than exports – making imports cheaper and inducing increased inbound foreign investment.

·         Recognize that a policy to beggar-thy-neighbor through export management isn’t viable for the long-run and that it is beneficial to move towards an economy where domestic consumption and investment become more important relative to exports.

·         Recognize that inflation is important and implement a two part monetary action that keeps the money supply from growing: (1) selling ThePretty for euros and (2) selling domestic bonds for ThePretty. By doing these two actions they increase and then decrease the domestic money supply. That is, they insulate or neutralize the international operation with a domestic one. In doing so, they assert control over their own money supply and price level. 

Trading partners are not dogs that always react to bells with spit – they are entities with numerous goals both in the long-term and short-term. They DO NOT HAVE TO hold on to dollars and they do not have to allow an influx of dollars to cause inflation. When dollars flow in that are NOT needed to buy US goods, services, or assets – they can simply sell them – putting even more pressure on currencies.  Depending on the country’s goals, this more extreme currency experience may or may not be debilitating but is the right thing to do. This is especially true with respect to the US – the reserve currency country – who is causing havoc through its own selfish and misguided monetary policies. If the US supplies too many dollars for the world to digest and countries choose to hold their reserves in non-dollar currencies, then the source of the global inflation problem will be more apparent and there will be:

·         More global attention to the misguided US policy

·         More US attention to the misguided US policy

·        A move away from the dollar as a reserve currency

The conclusion is that while the US is now the guilty vortex, it is also true that many other countries are not innocents in the process of global inflation. These countries, through their own selfish and misguided policies abet and unwittingly support the US.  The world is not automatically sentenced to global inflation because of US monetary policy – it very much depends on the goals and policies of our trading parties.

You might retort that if countries don’t use the extra dollars to buy US assets then they will have to buy assets of other countries. And this is true. So why aren’t they more willing to buy the currencies and assets of say China, Brazil, Canada, and many others? The answers are numerous and depend on the specific circumstances of each country. China’s currency is not fully convertible. Other countries may be growing rapidly but a more thorough look at these countries might uncover risk flags.  Despite all the failures of US policy the big picture suggests that to date US assets offer some stability and insulation from extreme financial risk. So many countries continue to hold or buy dollars and dollar assets because they offer attractive risk adjusted real returns. This is not so much because the dollar is the world’s reserve currency. It makes sense because the US offers better/safer investment returns.

So these countries are not without some blame for current global trade problems. If China, India, Brazil, Canada and various other countries had better overall economic policies, then perhaps more nations would be more willing to buy their currencies and assets to replace dollars.

Our current global situation is a phase of a long-term economic development process wherein a couple of world wars and a cold war intervened and held back the economic progress of many countries. Since the 1950s we have witnessed a gradual if not fitful time period in which many countries experimented with and then shed some pretty awful economic policies. But the transformation is not complete and despite great economic progress in many countries, they still contain visible and troublesome weak spots. The world is investing more of its money in these places and will invest even more as time and further actions solidify a more sanguine view of their investment worthiness.  As risks in these countries converge on US risk, we will enter a new time where US mistakes will lead to fewer global ramifications and where the US is no longer able to propagate world inflation.

So let’s keep pointing our boney digits at the US. But let’s also recognize that any real solution requires that US enablers have to clean-up their acts too.  Yes, the US is responsible for printing too much money and leaving it out there for too long. But China needs to hasten its pace of economic development and reply less on exports. Along the way it needs to make its currency fully convertible and more open to market changes. India, Brazil, S. Korea and several other developing countries have responsibilities to find balance between exports and domestic spending. They too could hasten the pace of reforms, especially those that reduce trade barriers. So long as the world gives these countries a free pass we are stuck in second gear—a gear that guarantees that the US has a disproportionate effect on the global economy. We can make the US a smaller disturbance by making the US a more equal global trade partner. We do this not by making the US smaller – but by making her trading partners whole.