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Weekend Readings


Perhaps my favorite read over the weekend was an article in the NYT Magazine, in The Way We Live Now section entitled "Help Wanted". Please make a special effort to read it. It is a rare article that hits on so many important macroeconomic themes so tangentially yet so deftly; if articles could speak softly but carry a big stick, this one would.

Most readers are aware of the ongoing debate between the reflationists and the deflationists: between those that think in a flat currency-based democracy, every road leads eventually to inflation and those that see the deflationary forces of cheap labor, excess global capacity, and a potential race-to-the-bottom currency devaluation scenario paving over any such road. The forces of Ben Bernanke's unlimited printing press vs the billions of Chinese and Indian workers willing and able to live on subsistence wages writing software, or staffing call centers: which one has more staying power?

The following paragraph should whet your appetite:

"According to company executives, IBM is considering shifting white-collar positions to India, where a competent novice computer programmer costs $5,000 per year instead of $60,000. Such a move would help keep the firm competitive and mean lower prices for consumers. But which consumers you might ask. Laid-off IBM managers? what point does remaining competitive dry up and dissipate the disposable incomes being competed for?"

Over the last several months I have been reading much and, to your benefit, writing little about the China question. There is much informed debate about just what kind of hand they hold in the game of world macroeconomics. Of the $935 billion in US Treasury debt owned by foreign central banks, they account for only $120 billion but, owing to the trade deficit we have with them, it is growing quite rapidly. The largest holder, Japan, owns $428 billion; both countries are big buyers of US Treasuries, not least for the benefit of keeping their currencies weak against the dollar in an effort to maintain their export-lead economies. China remains the largest force for deflation in the world, they peg their currency to the US dollar (8.28 Yuan/$), and administration officials like Treasury Secretary Snow have become increasingly vocal of late about the administration's desire to see the Yuan a bit stronger against the dollar. Whether these hints are anything more than pre-election year preening to US manufacturers and unions remains to be seen.

The China question is one we all need to get smarter about. Not today. Not tomorrow. But eventually.

The other article I would mention is Gretchen Morgenson's article in the Business section of the Sunday NYT: "Mortgage Markets Are Out of Control" for the perspective that it gives on the size and influence of the mortgage market. By pumping such enormous liquidity into the US economy since 9/11, the Fed's design to stimulate the economy through low rates has produced an extraordinary unintended consequence: our overall economic health is tied hip to hip with interest rates. With record low rates for the last two years, we just experienced the good part of that relationship: mortgage refis, increases in discretionary income, etc.

What happens if we experience the bad part of that relationship is anybody's guess. With the mortgage market's tail wagging the economy's dog, there is reason to be wary.
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