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1. Another Slowdown

Author:
John H. Makin
Publication Date:
06-2011
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
Market conditions in the United States, Japan, China, and Europe portend a weakening global economy. While not dramatic in any one region save an earthquake-burdened Japan, these conditions could accumulate to create a problematic loss of momentum for global growth, especially compared to current upbeat consensus views for the second half of 2011.
Topic:
Economics, International Trade and Finance, and Global Recession
Political Geography:
United States, Japan, China, and Europe

2. The Year to Date

Author:
John H. Makin
Publication Date:
03-2011
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
The array of postbubble stresses and uncertainties identified in the January 2010 Economic Outlook (“The Year Ahead”) promised that the new year would see plenty of volatility in markets. That is exactly what is playing out as we move through the first quarter. As risks accumulate, it may be that 2010 is shaping up as a mirror image of 2009, reversing last year's down-then-up pattern with an up-then-down pattern this year.
Topic:
Economics, International Trade and Finance, Markets, Monetary Policy, and Financial Crisis
Political Geography:
United States, Japan, China, and Europe

3. The Year Ahead

Author:
John H. Makin
Publication Date:
01-2010
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
We can expect 2010 to be a volatile year. This likelihood is underscored by looking back at 2008 and 2009. Two thousand eight was a highly volatile year leading up to the collapse of Lehman Brothers in September, which was followed by the risk of a total systemic meltdown. That sharp and obvious risk spike prompted massive policy responses that were simply the largest that central banks, with rate cuts and liquidity provision, and governments, with tax cuts and spending increases, could manage. The result—beginning in March 2009—was a linear rise in the prices of risky assets, the result of massive relief once the slip into a global depression had been averted and the acute phase of the crisis in the financial sector had passed.
Topic:
Economics, International Trade and Finance, Markets, and Financial Crisis
Political Geography:
United States, Japan, China, and Europe

4. China: Bogus Boom?

Author:
John H. Makin
Publication Date:
08-2009
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
China's economic statistics have become the envy of the world. On July 15, China reported a 7.9 percent growth rate for the second quarter of 2009 compared to the same period a year earlier. Meanwhile, China's stock markets are on fire, and its property markets are heating up fast as well. Shanghai's two stock markets are up 75 percent and 95 percent respectively so far this year. The more widely traded Hong Kong Index is up 27 percent, a stellar performance compared to largely flat stock markets in the United States, Europe, and Japan. In even stronger contrast, Russia, which is one of China's emerging-market peers, has seen its economy drop by 10.1 percent during the first half of this year, while its stock market has struggled as well.
Topic:
Economics, Emerging Markets, and International Political Economy
Political Geography:
Russia, United States, Japan, China, Europe, and Hong Kong

5. Can China Keep Growing?

Author:
John H. Makin
Publication Date:
05-2009
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
Governor Zhou Xiaochuan's comment is an open acknowledgement that the “adverse feedback loop,” in which financial-sector problems hurt the real economy, which in turn intensifies negative conditions in finance, has hit China hard. China's real growth rate, which peaked at 13 percent in 2007 and is heavily dependent on exports, plunged to 6.1 percent on a year-over-year basis in the first quarter of 2009. Nominal growth, a measure of the current money value of goods and services, fell even more sharply, from 21.4 percent in 2007 to 3.6 percent in the first quarter of this year. The fact that the nominal growth rate is 2.5 percent below the real growth rate suggests that, at least as far as output is concerned, deflation has taken hold at a 2.5 percent rate in China.
Topic:
Economics, Emerging Markets, and International Political Economy
Political Geography:
China

6. China and the United States

Author:
John H. Makin
Publication Date:
12-2009
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
A new truth of geopolitics has emerged during 2009. It is that the complex and rapidly evolving Sino-American relationship has become the most important bilateral relationship either country has. To this observation, made recently by William C. McCahill Jr. in the November 13 special issue of The China Report, must be added another claim: the course of the Sino-American relationship in both the economic and the political spheres will play a growing role in determining the levels of global economic and geopolitical stability. Trips like President Barack Obama's three-day visit to Shanghai and Beijing November 15–17 will probably be made with increasing frequency in coming years.
Topic:
International Relations, Foreign Policy, Diplomacy, International Political Economy, International Trade and Finance, and Bilateral Relations
Political Geography:
United States, China, America, Shanghai, and Beijing

7. Inflation Scare: Crazy but Real

Author:
John H. Makin
Publication Date:
07-2009
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
The recent steps by the Federal Reserve to preempt deflation have—ironically and unexpectedly— prompted a surge in inflation fears both inside the United States and abroad, especially in China. Specifically, the Fed's measures to go beyond the stimulus inherent in a zero percent federal funds rate by purchasing Treasury and mortgage securities has conjured visions—especially in the eyes of major buyers of Treasury securities, China foremost— of massive money printing to underwrite trillions of dollars of additional government borrowing at low interest rates. As markets have shown, if that were the Fed's intention—which it decidedly is not—the effort would fail because excessive money printing—creating a money supply larger than the quantity of money demanded— would push up interest rates as inflation expectations rose.
Topic:
Economics, International Political Economy, International Trade and Finance, and Monetary Policy
Political Geography:
United States and China

8. Three Lessons from the Financial Crisis

Author:
John H. Makin
Publication Date:
09-2009
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
More than two years have passed since the U.S. housing bubble burst. That event ushered in a financial crisis that was not only intense but also stunning. So stunning in fact, that in August of last year, just a month before the collapse of Lehman Brothers, the global economy was close to a crisis worthy of comparison with the Great Depression, yet neither the markets nor the Federal Reserve had much of an inkling of what was to come. The Standard and Poor's (S) 500 Index had come down to about 1,300 from its October 2007 high of 1,576. Positive growth had just been reported for the U.S. economy during the second quarter of 2008 at an annual rate of 2.8 percent (later revised down to 1.5 percent). Almost one percentage point of that growth came from U.S. consumption, and government spending also contributed. The wave of relief after the Bear Stearns scare in March 2008 had provided a nice boost to the economy and to markets. That boost was further enhanced by the substantial contribution to growth from net exports (2.9 percentage points) thanks to what was, then, continuing strength in the global economy, especially in China, which had reported blistering 10.1 percent year-over-year growth in the second quarter of 2008. These and other positive components more than offset a drag from inventories and residential investment. In short, the real economy had not shown much evidence of damage emanating from the chaos that was churning in the financial sector.
Topic:
Economics, International Political Economy, International Trade and Finance, Markets, Monetary Policy, and Financial Crisis
Political Geography:
United States and China

9. The Wealth of Modern Nations

Author:
John H. Makin
Publication Date:
01-2007
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
Top economic policymakers from China and the United States met in Beijing in mid-December 2006 for the first round of what has been called the U.S.-China Strategic Economic Dialogue (SED). There is a lot more at stake than the level of China's currency when the world's premier economic sprinter—China—meets with the world's premier economic long-distance runner—America. The fundamental issue at hand is the creation and preservation of wealth of two nations, each of which has much to teach the other. The right outcome from the dialogue would provide a substantial boost to the global economy in coming years, while the wrong outcome would threaten the continuation of global prosperity.
Topic:
International Relations and Economics
Political Geography:
United States, China, Beijing, and Asia

10. China Needs to Float the Yuan--for China's Sake

Author:
John H. Makin
Publication Date:
05-2006
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
In their April 21 press release following their spring meeting in Washington, D.C., the G7 finance ministers and central bank governors added an important sentence to their usual bland statement that exchange rates should reflect economic fundamentals: Greater exchange rate flexibility is desirable in emerging economies with large current account surpluses, especially China, for necessary adjustments to occur. In their April 21 press release following their spring meeting in Washington, D.C., the G7 finance ministers and central bank governors added an important sentence to their usual bland statement that exchange rates should reflect economic fundamentals: Greater exchange rate flexibility is desirable in emerging economies with large current account surpluses, especially China, for necessary adjustments to occur. The G7, significantly, also called for an increased role for the International Monetary Fund (IMF) to help countries, including those in the G7 but also China and others in emerging Asia, meet the macroeconomic and financial policy challenge of globalization. Specifically, the G7 supported the strengthening of IMF surveillance, including through increased emphasis on the consistency of exchange rate policies with domestic policies and a market-based international monetary system and on the spillover effects of domestic policies on other countries. The G7s endorsement of greater exchange-rate flexibility and of an enhanced IMF role in implementing it is important. The IMF, having been founded after World War II to maintain stable exchange rates among major economies, has become an advocate on behalf of the major economies of global exchange-rate flexibility. The lesson regarding the need for G7 currency flexibility was learned after Americas August 1971 abandonment of fixed exchange rates, which was followed by a decade of adjustments to higher oil prices that would have wreaked havoc under fixed exchange rates. The lesson for needed currency flexibility in emerging markets was learned after the disastrous attempt, fostered in part by the IMF, to impose fixed exchange rates during the Asian and Russian crises of 1997 and 1998, which prolonged and exacerbated the market gyrations caused by the crises. Sadly, China response to the G7-IMF call for greater currency flexibility has been both negative and misguided. China's foolishly insouciant attitude, captured in a comment by Zhou Xiao-chuan, governor of the Peoples Bank of China, carries with it serious risks both for China and for the world economy. Zhous remark was quoted on April 24 in the Wall Street Journal: [T]he speed of moving forward (on yuan appreciation) is OK. Its good for China and welcomed by many other countries. China's currency has appreciated only 1.2 percent since its initial 2.1 percent revaluation last July 21. That is less than OK. The total 3.3 percent revaluation against the dollar really represents no adjustment at all in view of the 1 to 2 percent inflation differential (lower in China) that has persisted between the United States and China over the past two years. If China had allowed prices to rise instead of mandating caps on prices of important commodities like gasoline, there would be less pressure for the yuan to rise in value. Both the intervention to cap the yuans appreciation and the capping of domestic prices are building up potentially disruptive inflation pressure inside China, as we shall see below. The most dangerous aspect of China's increased efforts to prevent yuan appreciation, as measured by accelerating reserve accumulation over the past year, is the rising pool of liquidity inside China that has resulted. The level of excess reserves in Chinese banks is now larger, relative to GDP, than the level of excess reserves built up in Japan from 2001 to 2005 during the years of a prolonged, desperate struggle against deflation. China's currency undervaluation, coupled with the massive liquidity buildup in its banking system, has resulted in excessive investment in China's state enterprises that have close traditional ties with the liquidity-sodden banks. The usual Chinese response to excess reserves has been to boost reserve requirements for its banks. But to absorb the huge pool of excess reserves now in place, reserve requirements would have to be boosted by 5 percentage points to 12.5 per-cent, going far beyond previous moves of 0.5 to 1 percentage point, and far beyond what China's shaky, insolvent banks could endure. When the Peoples Bank of China boosted its one-year benchmark lending rate on April 26 by 27 basis points (to 5.85 percent), it took a tiny step that will do little to tighten China's monetary stance.
Topic:
Development, Economics, and International Trade and Finance
Political Geography:
United States, China, and Washington