HEADING FOR A HARD LANDING?

As one of my intellectual heroes, Herb Stein, observed: “If a thing cannot go on forever, it will stop.” The growing financial imbalance in the world seems to be a strong candidate for the next chapter in Lessons Learned the Hard Way, a book I’ve been working on for 63 years now.

Consider the numbers in the following table, prepared by IAS staff using official data through the IMF:

Foreign Exchange Reserves

Top Ten Countries in Asia (Valued in Billions of USD)

	2005 Q2	2005 Q4	2006 Q2	2006 Q4	2007 Q2	2007 Q4	2008 Q1
China (Total)	838.71	949.84	1075.63	1208.69	1480.06	1694.18	1857.29
*Mainland	710.97	818.87	941.12	1066.34	1332.63	1528.25	1682.18
*Hong Kong	122.00	124.28	126.63	133.21	136.31	152.70	160.78
*Macau	5.74	6.69	7.88	9.13	11.13	13.23	14.34
Japan	843.54	846.90	864.88	895.32	913.57	973.37	1015.59
India	138.37	142.82	162.91	177.25	213.35	275.32	309.72
Taiwan	253.62	253.29	260.35	266.15	266.05	270.31	289.38
South Korea	204.99	210.39	224.36	238.96	250.70	262.22	264.25
Singapore	114.90	116.17	128.32	136.26	144.06	162.96	177.46
Malaysia	74.76	70.18	78.77	82.46	98.40	101.34	120.29
Thailand	48.36	52.07	58.06	66.98	73.00	87.46	109.97
Indonesia	33.87	34.72	40.11	42.59	50.92	56.92	58.99
Philippines	17.70	18.49	21.12	22.97	26.38	33.75	36.62
TOTAL	2568.81	2694.88	2914.49	3137.62	3516.50	3917.82	4239.55

In other words, these ten Asian countries have piled up huge foreign exchange reserves – more than four trillion dollars’ worth as of March 31 of this year -- as the result of their continued massive current account surpluses. Those reserves are growing rapidly – up almost 70 percent in the eleven quarters since mid-2005. These numbers are shocking because China, Japan and Korea (at least) have taken measures since 2004-5 that were supposed to ameliorate what was then perceived to be a dangerous imbalance in payments. Unless something is done sooner, the Asian holdings of foreign reserves will shoot past five trillion dollars before the next American president gets his feet on the ground.

Under IMF Article 4, all members are obligated to avoid using exchange rates to prevent adjustment of imbalances in trade flows and balance of payments. It is no secret the IMF is a paper pussy cat, lacking any credible means of dissuasion to governments intent on a mercantilist mission. Still, ignoring an obligation opens one up to such charges as we’ve heard in the presidential campaign that “China cheats.”

The other side of the coin was argued in the Wall Street Journal of June 9 by economist Judy Shelton (“The Weak-Dollar Threat to World Order” at http://online.wsj.com). She insists that, current Treasury and Fed rhetoric notwithstanding, America is pursuing a cynical weak dollar policy precisely to promote inflation. The Asians are acting so as to keep the dollar overvalued against their currencies, so it’s clear she’s talking about the weakness of the greenback in terms of euros, Canadian dollars, British pounds and other more or less freely floating currencies. Listen to her tough words:

“When the U.S. turns a blind eye to the consequences of diluting the value of its monetary unit, when we abuse the privilege of supplying the global currency by resorting to sleight-of-hand monetary policy to address our own economic problems – inflating our way out of the housing crisis, pushing taxpayers into higher brackets through stealth – it sends a disturbing message to the world.

“Why would a nation that espouses Adam Smith and the wisdom of the invisible hand permit its currency to confound the validity of price signals in the global marketplace? How can Americans champion the cause of free trade and exhort other nations to rid themselves of protectionist measures such as tariffs and subsidies – and then smugly claim that U.S. exports are becoming “more competitive” as the dollar sinks?

“That’s not competing. It’s cheating.”

Oh, that's great! In the high-stakes poker game being played out in the waning months of the Bush administration, both sides think the other is cheating. Such scenarios must stop at some point and usually end in gunfights in which a lot of innocent bystanders are killed or wounded. Perhaps the Bush administration is betting it can bluff its way until noon on January 20 and then dump this unmanageable mess in the lap of the poor sucker who wins a majority in the Electoral College. What’s needed here is a heavy dose, not of altruism, but of enlightened self interest. Are there so few clear-headed governments that plurilateral negotiations can’t produce a rational solution to avert a hard landing? Can’t the Congress do something to persuade all the parties to come to the table? Won't someone please do something that makes sense?

Charles Blum