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On October 19th 2005 Fed Governor Richard Fisher wrote about Globalization
and Texas.
Since becoming Dallas Fed president, I have been stressing the importance
of globalization -- the trend toward falling international barriers to goods,
services, people, money and ideas, a process aided by the interconnective
properties of technology. It may well be the key development of our era;
yet, we do not understand it very well. Hoping to change that, I put in place
a new research program at the Dallas Fed that seeks a more systematic understanding
of how globalization impacts the pricing behavior of businesses and its implications
for inflation and monetary policy.
On the inflation-fighting front, globalization has been a positive factor.
Based on our work at the Dallas Fed, we know that globalization has provided
a powerful counterforce to domestic inflationary pressures. Some of these
are obvious. By lowering trade barriers and by opening to new economic participants
that range in size from China to Estonia, we have benefited on the inflation
front from the stiff competition of the global marketplace. At the same time,
competition from abroad acts as a check on price increases by our own producers.
In our Dallas Fed business surveys, companies tell us that globalization
has meant they have less pricing power than they once had. It makes life
harder for them, but it is good news for consumers. All you have to do is
wander down the aisles of any Wal-Mart or Target or JCPenney's or 7-Eleven
to see what I am talking about.
Fisher Changes His Tune
The Wall Street Journal is reporting Dallas
Fed's Fisher Changes His Tune On Globalization's Inflation Effects
A Fed policy maker who has long championed globalization's influence on
U.S. inflation says that influence has gone from good to bad.
"I sense that global capacity has moved from being a tailwind to a headwind
in terms of inflation control," Federal Reserve Bank of Dallas President
Richard Fisher said in an interview.
The Fed has traditionally considered the degree of spare capacity in the
U.S. economy an important determinant of inflation. For example, in the short
run, unusually low unemployment -- a measure of spare capacity in the labor
market -- has traditionally contributed to higher inflation. Since taking
... (the rest of the article is subscriber only)
Empty Cupboard Theory
Picking up Fisher's change in tune was Russ Winter writing about The
Empty Cupboard Sell Signal.
I usually pay little heed to Fedspeak, but once in awhile something emerges
that indicates a sea change. One Fed member, Richard Fisher, has been noted
as a globalization wing nut who believes in it's "deflationary" effect on
US prices. Now apparently he sees something in the "data" that doesn't square
right with him, as he issued the following remark: "I sense that global capacity
has moved from being a tailwind to a headwind in terms of inflation control."
I have been maintaining that much Asian exporting to the US is little more
than a game of Old Maid Cards. It's really not about profitability, especially
when negative externalities like pollution are measured in. Even the Chinese
have claimed that pollution as a cost comes in at around 3% (Green GDP study)
to 10% (ministerial study) of GDP. The export game is primarily a racket
where an elite group of inside cronies sell goods without the negative externalities
priced in for overvalued Dollars. They unload the Dollars on the PBoC (or
other quasi pegged currencies), who socialize the loss of the transaction
on the society at large. Inevitably, the effect of that socialization is
domestic inflation combined with a crack up boom. If the currency transactions
are not seriously subdued, and the true costs are not accounted for, then
the situation builds and builds. The counter steps required are two fold:
quit engaging in the currency racketeering, and start selling goods to the
US at closer to true cost. I think that's what Fisher is addressing. All
I can say is "duh".
I find it revealing that the UK, which has a strong currency, ends up with
a big inflation problem. The reason for this is that even more so than the
US, the UK is overwhelmed by the international hot money crowd, who just
drive prices sky high for every day English folk, or Brazil Brits should
we say? That's another downside to the nasty combination of globalization,
free capital flows, deregulated wildcat finance, and unlimited Bubbles and
manias. The more Bubbles are ignored and the more open and "appealing" your
economy is (to criminals and parasites), the more likely they will show up
with unlimited barrels of cash and credit, and drive your economy into a
crack up boom mode.
Cupboard Theory Rebuttal
Wildcat finance is indeed rampant, but exactly what does wildcat financing
have to do with globalization per se? Fisher had it right the first time. It
is probably one of the few things he has ever said that made any sense. It
is fitting that he has taken it back.
Deflationary Things
- Globalization is deflationary.
- Free trade is deflationary.
- Increased productivity is deflationary.
- Outsourcing is deflationary.
- Increased competition is deflationary.
- Free markets are deflationary.
Fisher has proved repeatedly that he does not understand what inflation is
or why prices go up. Now he has certainly proven that "we do not understand
[globalization] very well" if by "we" he means the Fed.
I read the entire article and Fisher cites rising wages in India and China
in conjunction with capacity constraints as the big issue. But if capacity
constraints are causing wages to rise as Fisher states, it is a huge leap of
faith as well as a serious mistake to blame globalization for those problems.
Globalization itself does not shift from being a deflationary force to an
inflationary force because of capacity constraints. The idea is silly. What
has gone wrong is not globalization, but rather something that strikes at the
very heart of the wildcat financing that Russ alludes to.
Wildcat financing and the current round of leveraged buyout, merger mania,
deal or no deal speculation with other people's money etc, all happened because
of government intervention and the lack of free market forces not because of
globalization.
I was asked just today by someone "What are the three biggest reasons why
housing is in the mess that it's in?" Here was my reply:
We ended up in this mess because of bad policies from Congress, bad policies
from this administration, and bad policies from the Fed, all compounded by
consumer greed. That is a toxic mix.
Starting with Congress we have had policies that encouraged housing via
tax breaks. We had the creation of Fannie Mae. There are 300 some odd programs
to make housing affordable. Well guess what happens when you go pushing houses
on everyone and handing out tax breaks? Prices go up.
The more programs that were created to make housing affordable the higher
prices went. Illinois Governor Rod Blagojevich went off the deep end with
a program guaranteeing mortgage loans for illegal aliens. The peak of insanity
was when Alphonso Jackson, Housing and Urban Development Secretary actually
went so far as to send this message to private sub-prime lenders: "I am absolutely
emphatic about winning back our share of the market that has slipped away
to subprime lenders."
Government talking about winning market share from the private sector on
housing is pure insanity. Then of course we have Bush's Ownership Policy
making renters feel like second class citizens. Government has no business
promoting one form of housing over another.
The Fed's role in this was slashing interest rates to 1% in an inane attempt
to prevent deflation in the aftermath of the last recession. At the same
time Greenspan openly endorsed arms right at the bottom of interest rate
yields. Greenspan is a man who was wrong at every major turn. History will
not treat him kindly. The role of consumer greed should be obvious.
Thus it is not globalization that is responsible for wildcat financing. Rather
wildcat financing was (and still is) a direct result of the anti-free-market
forces of Central Bankers worldwide, Congress, this administration, and the
governments of other nations all in cahoots to boost consumer spending in the
US while in a competitive currency debasement to increase exports.
Central bankers everywhere are in on the scheme, each with their agendas.
Russ refers to the process of pegging currencies and subsidized exports for
increasing worthless US dollars as "a game of Old Maid Cards". Once again,
while competitive devaluation and ponzi financing of US debt may be likened
to Old Maid (where no one really wants to hold dollars), globalization itself
is sure not cause of the problem.
By assuming that globalization is now causing inflation, Fisher is lending
support to the demagogues in Congress who want to slap tariffs on China and
label the Chinese as currency manipulators. It is obvious Fisher does not even
realize the implications of what he is suggesting. Rest assured a 25% tariff
on goods from China and increasing protectionism are not the proper cures for
anything.
Those blaming globalization for the mess we are in are simply missing the
boat.
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