China should be spending like a Keynesian.


Throughout the post second world war period, America’s economy played the role of a shock absorber to the global economy by being the spender of the last resort. Now, with the government and private American in debt, it is up to the savers of foreign currency reserve to spend.  (i put China in the title because they are the largest holder of foreign reserves.) These savers has been buying huge stockpiles of American debt partly for the purpose of keeping  their currency cheap to encourage Americans to buy their export. Its time to spend what they have saved by cashing in their American debt to buy American export.

Buying American Export will kill 2 birds with one stone. Since many savers are developing countries where there are many opportunities to gain productivity (and living standard) by investing and spending. The productivity gain alone can easily pay for the initial investment, result in few or no debt in the long run. This is lest true for developed countries that are already sitting on the technological frontier, and are thus at the inefficient end of diminishing return scale.

Buying American, will mean that the American government wont have to embrace the Keynesian option of trying to raise even more debt to spend their way of a recession, again. It will selectively boost America’s most competitive industry while reducing American debt and spread confident all around.

Why is there no sign of this happening? A lot of this has to do with the other rational for the build up of foreign reserves by the savers. Namely, to accumulate enough dollar to counter any excessive devaluation of their currency. In current crisis, the savers are even less likely to spend their savings, without which the savers would be vulnerable to currency fluctuation.

End game. In order for the savers to be comfortable enough to spend their savings, two things need to happen. (1)  a coordinated spending plan with the participation of all major dollar holders and (2) a guarantee to bail out in case of excessive currency devaluation by stronger and more independent IMF would be needed.

related stuff to read.
On liquidity crunch – “Baby-Sitting the Economy.”
On “The Causes and Consequences of the Economic Collapse

UPDATE 090403: G-20 Leaders To Give $1 Trillion To IMF, World Bank

G-20 participants announced a tripling of loans available to the International Monetary Fund, to $750 billion, a $250 billion expansion in a special IMF fund to help members\’ foreign exchange reserves, and $250 billion to the IMF to support trade. They also agreed to sell IMF-held gold to poor countries.

Thats an okey amount of money, but the point is that they prove that they are willing to use IMF and WB and they are willing to put resources into it. However whether this will be enough to get the savers to start spending will depend a lot on how exactly this money will be use, and who will have power over it. I personally knows too little about the inner working of the IMF and WB to offer any insight.

UPDATE 090405: World Wad
A world currency is another way to reduce currency shocks, naturally. SDR, if its rely upon more. SDR has a chance to become a predecessor to a new world currency, just like ECU is to Euro. Lets hope so.

The Keynesian Proposition


Over at Economist.com, they got Brad DeLong and Luigi Zingales representing Keynesianism and Neoclassical respectively over an online debate on the proposition “We are all Keynesians now.”

The proposition is awkwardly framed, i mean come’on, arguing for the proposition is like arguing that entire political and economic elites agrees over the remedy needed to recover from the current financial crisis, which is an impossible position to defend. This forced DeLong to declare defeat in the opening sentence of his opening remarks. And belatedly, moderator re-frame the debate to be “whether we—or rather, economists and policymakers—should be [Keynesian].” on the third day.

anyway, here is the problem

There are two recession dynamics at work:  (1) plummeting real estate value and consumer spending is discouraging or disabling mortgage payment, leading to piling bad debts that is spreading through the financial sector via securitization and derivatives, banks thus concentrating their capital on deleveraging and not lending to business for expansion. (2) lowering consumer spending is reacted with output contraction and increase unemployment, that further reduces spending and thus the deflationary spiral ensues.

and the Keynesian Proposition

Delong is obviously not against government intervention to get the banks to start landing again or using every possible monetary policy to stimulate the economy. What he is saying that those measures have limits. Monetary tools is already exhausted. and not without politically unacceptable amount of taxpayer’s money can government keep the banks capitalized.

Even with recapitalized banks, in the short-run, under overwhelming uncertainty and pessimism, healthy business that would have invested, will not; innovations that would been commercialize with venture capitalist‘s funding, will not; employed people would have leave their job to start a new spin-off, will not. And there are no guarantee that the money from the recapitalized banks wont just be used to fill another bubble, which is precisely what happen when federal bank pump money in response to the busting of Dot-com bubble in 2000 only to walk straight into a real estate bubble. Therefore, DeLong argues that in the absent of private investment and deteriorating consumer spending , government who can borrow cheaply has to step in to invest and spend.  DeLong also believes that government investment in public goods like infrastructure, basic research, education, broadband access in rural area can create new innovation and business opportunities that fuels economic growth in the future (off setting tax increase needed to pay government debt), and fights deflation now.

the criticism

The fear of fiscal stimulus is that it is hard to execute effectively, because government (by design is slow), wont move quick enough to start projects to deal with short-term problems. By the time government is able to initiate most of its spending, some private business that are ready to invest, will be force to compete with the government for capital (goods, service and labor). Even worst, if in a state of panic, the government is legitimized to pursuit projects that does not have benefit worthy of its cost in order to keep people employed, people will be under an illusion of job security,  and not looking for new job, retrain, or staring new entrepreneurial enterprises.

The other problem of allowing government to allocate resource is that it is often inefficient and it expands politician’s power and attract lobbyist, which by the way is already happening. Obama promised greater transparency to mitigate this problem, but even some Democrat supporter are skeptical.

Furthermore unlike isolated national economic recession, this is a global recession where US government borrowing will have an adverse effect of draining the fund other economies needs for their recovery, subsequently weakens demand for US exports that is crucial for recovery. Unfortunately, global dimension of the recession is noticeably absent from the debate.

to conclude.

If the fear of massive unemployment is that it will lead to social unrest and deflationary spiral, then the government should simply increase and extent unemployment benefit. When people’s livelihood are secure and not occupied by bogus project they will have time to fund jobs, retrain or invent the next growth inducing innovation. Government spending in public goods can be very efficient considering the low cost of everything in a recession. However as Zingales points out these these projects “should be argued on their own merits, not as a stimulus.

So, am i thinking Keynesian? I am not too sure, i mean the label Keynesian is so loaded with different meaning. I am however definitely for unemployment benefit in a recession.

more on this later.

Confession of an unapogetic traitor


Ever since high school, i have always suspected that people from homogeneous society in general expect other people who they identify to be of same culture heritage to behave in accordance to a common set of implicit rule of conducts. When those people (lets call them nationalist) meet people who do not act accordingly (lets call them traitors),  nationalist are surprised, confused, and feel disrespected by the traitor.

Well, i am a traitor. I first realize that i am a traitor, when i was a boarder a a n all boy high school in Australia. Unlike other Taiwanese boarders who came to Australia with a least 3 years of junior high school education in their native Taiwan, I left for Australia with only mix of local primary school and English christian school education at the age of 12, by myself. I was profoundly more influenced by Australian culture than other Taiwanese kids. Unfortunate, those kids were mostly told by their rich parents to leave their comfort zone in taiwan, to study overseas. Those kids have little fascination with foreign culture. Those kids could not have appreciated the complexities of a semi-assimilated kid like me. Instead they expected me to act and understand those implicit social rules that they learn during their junior high years in taiwan. They nor i understood the nuanced idea of implicit rules.

The more i hang out with those Taiwanese kids, the more weird they though i am. i mean i remember being call a banana (western minded Asians) when i speak mix English in my conversation with other Taiwanese kids. I still remember vividly the looks of disdain from a Taiwanese kid when i ask an Australian kid if i can take a bite off his cake. Apparently, self respected Taiwanese kids don’t do that in Taiwan. hang with Taiwanese kids didnt work out, hanging with white-Australian, didn’t felt right too. being called a  gook is not a comfortable experiance, to say the least.  I end up spending most of my high school years finding refuge with a mixture of minorities who’s own national was not big enough to form a homogeneous group.

By the time i got to university, most of my friends where non-Taiwanese kids whom are them self oversea students or people with working holiday visas.   They were comforting. They were curios of foreign culture. They did not expect me to understand their own culture and custom, and the openly embrace difference (to some extent).

After 15 years of living oversea, i am back on home(?) turf and working in an office of a multinational corporation, with a mixture of Taiwanese and Japanese. I thought i am working with professionals and free from the sentimental nationalistic school kids. I was wrong. I am still having trouble mingling with a couple of nationalistic co-workers. I am still condemn for speaking English or Japanese when I am accompanied by Taiwanese. Nationalist are angry with me because i speak with a volume that is not appropriate for my status (!?!?). Nationalist are angry with me because during company dinner, i was eating too much and not toppling enough wine for the seniors.

I give up, i don’t get it, i don’t get why and how am i suppose to act as a “Taiwanese” and i cant help but to think that those nationalist are just bigot.

sadly, this is not a uniquely Taiwanese experience. African-Americans refer to other African-Americans who embrace some aspect of white-American culture as acting-white.

After years, of living as a Taiwanese traitor, i have happier than ever with me cosmopolitan identity. Its up to the nationalist to make their peace with traitors and realize that creeds are not determine by birth. Nationalist need to open their eyes to see, in a globalizing world, they are a not only a dying bread but also on the wrong side of history.

Lastly, The future is brown, and we cosmopolitan traitors will inherit the earth.

Dont BS me, please


A friend of mine insist to me, that Japanese Economy is doing better and going to take over the United States, as the next economic juggernaut.

I really dont know what he is talking about, because, Japanese economy has been producing miserably lower GDP growth than the US every year since the burst of Japan’s economic bubble in 1991-2.

Maybe, he was referring to the current economic recession. But that can’t be right because, although the American financial institution is the epicenter of the shit that we are in, their economy shrunk by 3.8% in the last quoter of 2008, Whereas the Japan’s economic contracted by 3.2% during the same time.

So I guess the jury is still out on which economy will weather the recession better. This hardly proves that Japan’s economy so somehow superior to America’s

So, what was he on? I don’t know. He was not making sense to me.

The end.

ps. moral of the story: Don’t BS me, please

Chanced Entitlement


off All persuasion, the conclusion i draw from the debate over free will in that the free will is incoherent and ultimately fallacious is perhaps one of the two most fundamental pillars of my moral philosophy. The other being The Golden Rule.

it is with this in mind, i reject the view that those who possess properties that happens to be preferred by the society are somehow more worthy then other. in fact, i cant help but feel a little disgusted by people with their unapologetically entitled demeanor. These people claim superiority just because they happens to be born in a developed country, with wealthy and nurturing parents, grow up in nice neighborhood and received expensive schooling. These people are ignorant of the fact that their better traits, developed taste, high culture, achievement and sophistication are not the fruit of their own initiative but simply the result of luck.

sure, people are entitle to value themselves as they see fit. and my view on the subject are not some sort of metaphysical truth. I just want to rant how i am disgusted by these people, because these days i seem to meet more of these narcissists with all their barely concealed sense of entitlement.

Update 2010/12/20: when i originally wrote this, it was not intended to be a serious piece, but a quick rant. The part on the golden rule is later added. One more point. I of course dont mean to imply that those who are supposedly success, in spite of their background poor environment can claim their superiority. They cannot. Simply because whatever kinds of success or failure a person end up attaining, it the result of the accumulated interaction between the genes and the environment (good or bad). And that both the genes that conceived and the environment that raised us are the result of chance. Therefore neither success nor failure should form the podium to condescend from or the pit to be condescended to.