Saturday, August 16, 2008

Recommended Reading

Very interesting article in The New York Times about Nouriel Roubini. I don't agree with him on everything of course, particularly not his Keynesian leanings, but he is still one of the best economic analysts around, and his (and mine) bearishness has been vindicated by the latest year's events. Interesting aspect of the article is how it highlights the complete failure of the mathematical models used by most academic economists these days, and how these models was what prevented them from seeing what would happen.

Peter Schiff has written a really good article about how the recent dollar strength is very damaging to the world economy and prevents necessary adjustments. As you know, I doubt that this rally will last more than at most a few months, but the fact that it has started in the first place will cause significant damage.

Some excerpts:
"America does indeed pose a global threat, but not for the reasons these economists suppose. Foreign economies are suffering not because Americans have slowed their voracious spending, but because they are defaulting on hundreds of billions of dollars of existing loans underwritten by lenders around the world.

The conventional wisdom is that foreign economies depend on Americans to buy their exports. This is false. The global expansion of the past decade has created new demand everywhere, and people and businesses in all corners of the world are spending. However, in America, spending has largely been achieved through a massive vendor financing scheme. Foreign supplied credit has allowed Americans to continue buying, even while American income and savings have dropped. As this credit goes bad, the losses are landing on the bottom lines of foreign financial firms. In other words, the global pain is not resulting from American contraction but from having financed our preceding expansion. This is a critical distinction few have been able to make, and it is vital to appreciating the decoupling that has already occurred beneath the surface.

The current losses that banks in Europe and Asia are now suffering are real, but future losses can be avoided by suspending future lending to Americans. Shutting off this credit will of course torpedo the dollar, but that is precisely what must occur. By allowing the dollar to drop to its natural, unsupported level, not only will the American caboose be decoupled from the global gravy train, but the rest of the cars will move along the tracks much faster....

...Some foolishly believe that many of the world’s problems result from dollar weakness, and that pushing the dollar back up would be good for all. For example, since the weak dollar is contributing to the rise in oil prices, a stronger dollar should help bring prices down. However, if foreign governments weaken their own currencies to push the dollar up, they will simply succeed in bringing oil prices down for Americans. Oil prices will go up for their own citizens. This can’t be an attractive bargain for any European or Asian political leader."


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