Just noticed your comment. Yes what you say is correct. I have just put in a submission on funding the National Broadband Network which you can see here.

http://stableproductivemoney.wordpress.com/2009/06/12/submission-to-national-broadband-network-greenfields/

I am trying to find better ways to explain what is proposed. Another way is that we stop banks issuing loans that are backed by other loans as the way to increase the money supply. We use amassets (or something similar) that guarantees that when we increase the money supply there is something tangible backing it.

The US military is also dependent on foreign held US dollars being repatriated via purchasing treasuries. The very weird thing is that the US could not fund its military without trade deficits. I think china is going to tire funding its rival’s military soon.

I don’t think it was just the Asians holding down consumption. The US knew they could take advantage of the dollar reserve status by spending like crazy overseas, military bases and trade deficits, and the money would come back to them to spend again. It was a massive free ride and the US took it. The top 10% got extremely rich and the rest are up shit creek without social security and health care.

Regarding the weimar problems, why was it that if the hyperinflation was due in part to vital good scarcity driving inflation in the post war years, that the nazi reichsmark managed to revive the economy

Actually, the Nazis did not issue the Reichmark. What happened was that the Germans replaced the hyperinflated Papiermark with the Rentenmark in Nov 1923, which was backed by mortgaged land and industrial goods. That Rentenmark was just an intermediate currency and wasn’t legal tender. The Reichsmark become the new legal tender in August 1924.

So, the hyperinflation ended long before the Nazis came into power. Here comes the interesting facts of what happened,

At the same time the issues of new rentenmarks increased, and their circulation amounted to 501 millions on November 30th, 1923; 1,049 millions on December 31st; 1,760 millions on March 31st, 1924; and 1,803 millions on July 31st following.

It is well, then, to remember this: the stabilization of the German exchange was not obtained by means of contraction, or even by a stoppage of the expansion of the circulation of legal currency. On the contrary, the quantity of the legal currency rose considerably.

The stabilisation of the German currency happened in spite of monetary inflation. There’s no conclusive explanation in the book though.

http://www.newscientist.com/special/can-science-reinvent-economy

I agree, in part, with you’re conclusions as well.

My analysis is more of an attempt to reach conclusions on how these dynamics will play-out using organons of logic, rather than an attempt to make a moral judgment call.

Although, in some instances when the rules of “fair” trade, are not bent, but broken, then we have an outcome that is for all concerned a race to the bottom.

On the one hand, the leading proponent countries of laissez-faire free-market ideology, who chose the rules, have had it shoved right back down their throats.

Having said the above, the Asian development model did produce more goods & services than what the region had been prepared to consume.

So the question is why did they produce more than what they were prepared to consume?

This point on its own, suggest that it has nothing to do with their culture of saving, but their choice of over producing above their own desire to consume and to export the balance to their trading partners.

Now given the raison d’etre of the existing economic system is based on the culture of consumption they were able to find ready markets prepared to consume their tradable goods. If that were not the case, there would be no reason to attempt this policy.

I conclude the economic model based on consumption, and in some countries, over consumption, is at the heart of the problem.

I agree with your observations however I don’t understand what’s wrong with what they are doing.

“Governments of this region have adhered to policy stances that have suppressed, or at least, not provided the necessary conditions to enable their domestic market consumption to flourish.”

Why should they enable that consumption? I would argue that Asian culture is about moderation in consumption. It is also about accumulation. “To be rich is glorious.”

I think that they are right. We are wrong.

Obviously there might be some problems caused by the trade imbalance but I think they are well aware that maybe 20 or 30 years of cheap commodities are left and then the party is over. They want to build as much infrastructure and real wealth as they can over the next 20 years and start worrying about the consumption later.

American consumers will be tossed away as an empty eggshell at some point in the future. So what?

“Don’t underestimate the degree to which Asians think ahead. They are quite prepared to sacrifice personal consumption for benefits arising in 20 years time.”

You make some valid points.

Although, the relevance and nuinsece of my point has more to do with a critique of the development model that Governments of the Asian ecomonic region have implemented post WWII. Please let me explain.

The Asian economic development model has, and is still, focused on running current account surpluses.

For this region to maintain current account surpluses, they *must* be, by definition, producing more goods & services in excess of what they are willing to consume. This is an indisputable truism.

Governments of this region have adhered to policy stances that have suppressed, or at least, not provided the necessary conditions to enable their domestic market consumption to flourish. Whilst in equal time, the Asian development model has focused on the development of the regions export industries.

This policy stance has resulted in the successful expansion of the regions industrial productive capacity, for the sole purpose of increasing the supply of tradable goods and services to its trading partners.

This stance, amongst many other less dominant factors, has manifested enormous trade and competitive imbalances between the various trading nations. These trading and competitive imbalances are particularly prevalent between the US and PRC, although the US and PRC are not on their own here.

Moreover, it is the automatic consequence of the PRC’s need for the US to absorb its vast manufacturing overcapacity. Nothing scares the mandarins of Beijing more than the idea that the US might undergo, or even force, a sharp reduction in its trade deficit with the PRC which, of course, would have the automatic impact of forcing the PRC lending to the US to collapse, as well as, collapsing their own export industry at the same time. The two are inextricably linked.

Whilst, China continues with such policies that maintain current account surpluses by supressing the RMB’s appreciation, they must continue to purchase USD denominated assets, if they do not wish to have the RMB appreciate significantly against the USD. This is an indisputable truism.

The PRC can of course purchase all manner of foreign assets that foreign governments will allow. There are, of course restrictions on what, and how much of what, foreign agents are able to invest in. This is nothing new nor ominus.

The PRC, are taking advantage of price declines, by divesting their USD reserves, through stock piling raw commodities. Although this activity is ephemeral in nature. Further, they appear to be purchasing non-USD denominated assets around the world, some of which are in our back yard. Please see:

”
SAFE’s Foray on Aussie Bank Assets Puzzles Market
By CSC staff, Published: January 08,2008
Related articles
A 200 million USD investment of China’s foreign reserves by the State Administration of Foreign Exchange has come as a surprise to international financial markets. How China will deal with its 1.5 trillion USD foreign reserve has been a mystery lately and small part of that mystery has just been answered. And it wasn’t as most people expected.

SAFE, through its Hong Kong-based subsidiary ‘SAFE Investment Company,’ purchased a minority stakes in three of Australia’s biggest banks — a 1% stake of both Australia & New Zealand Bank (AZZB) and Commonwealth Bank of Australia (CBA), and nearly 0.33% of the total stake of National Australia Bank — altogether at a cost of 200 million Australia dollars (USD 176 million)….”

http://www.chinastakes.com/article.aspx?id=138

A point to note, here, regarding central bank reserves is that they are *intended* to act as a buffer to counter currency shocks. This is, definitely, not the intended purpose of the PBoC $USD 2T reserve portfolio. When the PBoC goes off purchasing assets that can not be readily liqudated, and as such, go against the raison d’etre for accumulating currency reserves, then this accumulation of “reserves” has been garnered under impropriety.

This policy stance of reserves accumulation by PBoC, can not, and will not continue forever. At some point, the PRC will willingly, or through coercive uni-lateral measures taken by the US, alter its policy.

The PRC is still, at this very moment, running a current account surplus with the US, although significantly diminished to that of the recent past. The US consumer has taken the first step in this readjustment. Although, it is to early to say, whether the consumer retrenchment, on its own, is sufficient to cause the PRC to alter its long-term policy stance or merely continue its attempt to “get blood out of a stone”, through further currency depreciation. Time will tell.

It will be clearly evident, when the PRC has altered its policy stance to allow the RMB to appreciate with respect to the USD. This adjustment will likely not be sudden, rather a gradual readjustment that will be agreed upon between the PRC and USG. For both the fait of the US and that of PRC are intimately tied together.

The only other alternative is for the US to attempt to compete with PRC and offer PRC tradable goods & services that the the PRC desires over and above those that PRC can offer the US. This will not be an easy course to steer.

The dominant financial risk that the PRC may face, isn’t the risk that the USG won’t honor its Treasuries. Rather, it is the risk that the USD will eventually depreciate against the RMB, reducing the RMB value of PBoC’s Reserve portfolio.

The current rhetoric from the PRC mandarins suggests that there is a lack of commitment to any policy change. Take for example:

“China to Take Steps to Boost Exports; Will Keep Currency Stable

By Bloomberg News

May 27 (Bloomberg) — China’s State Council, or Cabinet, said the government will take steps to boost exports while keeping the country’s currency “basically stable,” the state television reported today.

Falling exports are the biggest challenge for the world’s third-largest economy, the council said.

China introduced a 4 trillion-yuan ($586 billion) stimulus package last year as exports slumped and economic growth slowed. Maintaining external demand can create favorable conditions for employment, businesses and domestic consumption, China Central Television said today, citing a council meeting headed by Premier Wen Jiabao.

The nation will keep its currency “basically stable at a reasonable and balanced level,” the council said, without elaborating.

China will take all measures to stabilize overseas demand as shrinking exports are the nation’s biggest challenge, “currently and for some period of time in the future,” the council said.

The government will focus on exports involving intensive labor and advanced technology, according to the report.

The government will arrange $84 billion in short-term export credit insurance for 2009, the council said. The coverage of export credit insurance will also be expanded, it said.

China will allocate additional funds to support exporter guarantees, according to the report. About $10 billion will be set aside as credit for the export industry in 2009, the state television said, without elaborating.”

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a_eNXWnQtdcg

The ABS is simply an adjunct of the modern version of Orwell’s Ministry of Truth (MoT).

It is neutered by political spin and coersion. Much like Treasury. Desperate measures for desperate times.

I think that the size of these Eastern European economies which are really sick is too small to start a meltdown. Sick are Lativia, Ukraine, to some extent Hungary and Slovakia. Not Poland though. Poland is doing quite well.

The political background of the conflict in Ukraine is coralling Ukrainians back to the Russian political backyard.

More on this:

http://www.smh.com.au/world/help-ukraine-pay-for-gas-or-its-cut-off-again-putin-warns-west-20090604-bx9z.html

and more:
http://www.boston.com/business/articles/2009/06/04/ukraine_economy_down_21_percent_in_q1/

I will need to spend several hours on reading so I may post another update on this tonight or tomorrow.

Briefly, the “textbook” definition of GDP is:

GDP = C+I+G+X-M
“GDP equals consumption plus investment plus government spending plus exports minus imports”

M fell by 9 billion, X (more on this in a sec) fell by 3 billion, so there was a +6 billion turnaround in the “net exports contribution to GDP” (as it’s known).

Now for a healthily growing economy, all 5 factors would be increasing–including imports, since lots of the C+I+G are spent purchasing them. But suddenly spending on imports has dropped $9 billion in a quarter–that’s over 2% of GDP. That implies that spending has dropped, not risen. This is not what I call a sustainable “growth” pattern.

Secondly, the “increase” in exports that was spruiked when the GDP figures came out. The GDP figure is a “real” measure: the ABS has survey info on nominal output, and then produces the real by deflating it (which produces what is known as the chain-weighted GDP figure). So they take actual dollar amounts and divide them by a range of price indices to generate the real GDP figure, which attempts to quantify the actual level in output.

Since we are a large exporter, the export price index is obviously important. This is normally revised by the ABS every June, to reflect changes in annual contract prices that are normally settled in April.

For some reason, they used the revised price index in this quarter’s figures–one quarter earlier than normal. These revised contracts have much lower prices–up to 40% falls for some commodities–so the resulting price index was much lower. (Thanks to Gerard Minack of Morgan Stanley for the detective work on this).

Divide a known dollar figure for coal exports by a smaller estimated price index and what do you get? A dramatic increase in the volume of coal exports… In fact, the exported tonnage probably fell significantly (this could be calculated by adding up all the reported tonnages, but since the ABS GDP survey works at the higher level of aggregation of dollars produced [and disaggregation would mean recording dollars of brown coal, dollars of coking coal, blah blah... and deflating each separately] this isn’t an option for them.

This explains the “huh” factor of the very next day’s announcement that we had gone from a substantial trade surplus to a deficit. How does that tally with the “increase” in exports in the GDP figures? The trade deficit is the dollar value of exports minus the dollar value of imports–there is no “price deflating” going on.

So putting this all together, the probable outcome for real output in the last quarter was a fall of over 2% (looking just at C+I+G+X).