International Financial Capitalism, Twenty-First Century Style
I am not sure that this argument hangs together. But it might be on the right path:
Brad Setser:
RGE - Is Stephen Pearlstein right?: Stephen Pearlstein... argues that [the] surge in demand for US financial assets from emerging economies -- and overwhelmingly from the governments of emerging economies, not private investors -- be they Asian central banks or oil investment funds -- has had a profound impact on the distribution of wealth in the US. I agree. Greenwich CT is partying (Goldman too) this weekend. Detroit, Michigan is not. At least not in the same way.
Pearstein writes:
These countries know that if they were to try to exchange all those dollars for their own currencies, it would drive down the value of the dollar -- and with it, demand by American consumers for all the things they sell. Rather than accept slower growth and higher unemployment, they have decided to keep their currencies loosely pegged to the dollar by investing those trade-surplus dollars in U.S. assets.
One obvious effect of this decision is to drive up demand for U.S. stocks, bonds and real estate... the tech and telecom bubbles of the 1990s, the current bubble in corporate takeovers and commercial real estate, and the just-ended bubble in residential real estate. Indirectly, it also helps explain why stock prices are at or near all-time records.... So what does this have to do with income inequality? Quite a bit, actually. We've known for a long time that increased trade with low-wage countries depresses wages of workers who produce goods and services now imported. A trade deficit equal to 7 percent of economic output obviously magnifies that effect.
But as the trade deficit is depressing wages at the bottom, it is now boosting incomes at the top by significantly inflating the value of stocks, bonds and real estate -- assets whose ownership is concentrated heavily in the hands of high-income people. By buying and selling these assets, and borrowing against them, these people have been transforming their paper wealth into spendable (and measurable) income at a record pace.
Finally, let's remember that all this buying, selling and monetizing of assets has created lots of fat fees for handling these transactions or serving as financial intermediaries. Those fees, in turn, translate into eye-popping bonuses for Wall Street investment bankers, hedge fund managers and partners in private-equity firms...
I have a nagging feeling that a large fraction of the current disruption reflects not just China’s integration into the global economy, but the integration China’s integration into the global economy at what increasingly looks like an signicantly undervalued exchange rate.... China will export about $1 trillion worth of goods in 2006. Its exports are heading into 2007 with 30% pace of growth. Think about that. If that pace of growth is sustained, the increase in China’s exports in 2007 will top China’s total exports in 2001. Which brings me back to Pearlstein’s column....
[W]e do have good data for the year from June 2004 to June 2005. During that period China bought about $185b of US debt, and roughly $50b in US goods. I doubt the basic pattern changed significantly in the last 18 months.
It isn’t hard to figure out why the past few years have been for those who manufacture debt than those who manufacture goods. Over time, the US economy has become increasingly specializes in the production and sale of financial assets to the PBoC -- and a few other big accounts.
The data on China is better than the data on the major oil exporters. But the same basic point holds. The big oil exporters don’t buy many US goods. Boeings, sure. But not much else. But they must buy a lot of US debt, albeit in ways that don’t register cleanly in the US data.
Pearlstein notes surge in demand for financial assets has had a profound impact on the distribution of income and wealth in the US. And these changes haven’t been -- at least to my mind -- simply the product of market forces. The oil exporters haven’t distributed the recent surge in oil revenues to their people and let their people decide how much to spend and how much to save -- or allowed their populations to decide what kind of financial assets to hold. No, they have budgeted for oil at say $30 or $35 (that’s changing) and put the difference between the budget price and the actual price on deposit with the central bank – or given it to the state oil fund. The Saudi fiscal surplus was $70b in 2006.... Norway added $50b to its government pension fund.... Russia’s reserves rose by over $100b.... China is a bit different.... [T]he PBoC ends up managing the chunk of private Chinese savings that is invested abroad.... [M]ost of the banks would prefer to sell their dollars to the PBoC and hold RMB if they had a chance....
Why can private equity funds, whether in the US or Europe, raise funds so easily in the leveraged loan market?... Cheap credit for private equity firms helps support equity market valuations generally. Central banks aren’t big players in the more exotic bits of the corporate credit market.... But by bidding up the price (and bringing the yield down) of more conventional assets, emerging market central banks demand has contributed to a host of innovations -- as other institutions are forced to search for yield....
The key point is simple: China and others emerging market governments haven’t just subsidized the consumers of their goods. They also have subsidized those manufacturing financial assets -- the have-mores of the global economy. Wall Street should have lifted a glass to the PBoC as they toasted the new year. The City should have toasted the Bank of Russia and a host of other oil state central banks
Call it financial capitalism, 21st century style.
