Bubble Also Caused by Neomercantlists

When I wrote for RealMoney, one of my continuing themes was that the Federal Reserve was less relevant because neomercantilistic nations like China (and perhaps OPEC nations) had reasons for promoting exports to the US that were less than economic.  As such they would buy US fixed income in order to facilitate their exports.  What could be sweeter?  You send goods; we send promises, denominated in our own currency.

With that, I want to point to a short post from Marginal Revolution.  Like me, he takes the “modified Austrian” view that the bubble was caused not only by the Fed, but also by the neomercantilists, both of which I fingered in my “Blame Game” series.  Buying longer dollar-denominated debt stimulated mortgage rates more than the Fed could, because under normal conditions the Fed can only affect the short end of the yield curve.

PS — What a long day, to NYC and back.  I appeared on Fox Business News show “Happy Hour.”  They said I did very well.  If I get video I will post it here.  As I have said before, time on live television goes fast.  The four minutes seemed like the blink of an eye.  At the end, Liz asked me for a third stock, and I blanked out, so I said Assurant (AIZ), a company that I love, but don’t currently own.  I will own it in the future.  I meant to say Pepsico (PEP), but it just didn’t come to mind.

I also had dinner with my friend Cody Willard after the show.  Though our rhetoric is different, we basically agree that the actions of the government in the bailout offer much possibility/potential for favoritism.  Also, that it is easy to start a bailout, and hard to end one.

Let the government chew on this: Pepsico issued $3.3 billion of corporate debt Tuesday.  For a company with recession-proof products and a Aa2/A+/AA- balance sheet, for them to pay 4%+ over Treasuries is astounding.  Liquidity?  What liquidity?  If financing needs are outside the A-1/P-1/F1 CP box, there is no help.  Not that there should be help, but the corporate bond market is a truer indicator of our stress than the money markets, which still aren’t in great shape.

Disclosure: Author is long NUE PRE PEP.

Comments

[phdinsuntan...:]

are you sying that the rest of the world is
guilty of giving credit to the US? sell som
PEPs and get a coke!

2008 Oct 22 12:19 PM

[MarvinMBA:]

I suppose it made it easy to sell paper overseas and bring back the bucks to pay of the home builders and property sellers. Thats now stopped. But at this junction I still do not see long term rates rising which they should be all things being equal which of course they are not. Thats saying our economy is in the dumps big time!!!! You are going to have to wait a long long long long time before you see RE valuations return....WHERE ARE THE JOBS AND BIG SALARIES TO SUPPORT A RETURN TO THE RETAIL AND REAL ESTATE SECTORS. I suppose the next jobs are going to work-make jobs provided by Uncle Sam because the private sector....banking and stockbrokerage is be
socialized. Will USam do the same for the Auto Industry...etc.etc etc...where are we going?????????????????...

2008 Oct 22 01:22 PM

[Urbane Gori...:]

Very valid points. Unlike the first poster, I understand what you are saying. In fact, China and Japan both hold a ton of our paper in order to give us the capital to spend. This actually is old news and has been reported many times in the last few years.

If those **horrible** banks are guilty of lending underqualified homeowners, if those **terrible** credit card issuers are guilty of handing out credit to unemployed college kids, if Reno is **reprehensible** for extending margin to gamblers.... Then where is the big difference.

Merkel is right. Foreign lenders are just as responsible in this mess as we are.

jegan

GOP for Obama

2008 Oct 22 07:47 PM

[xander:]

we should force countries that export to us to buy goods and services roughly equal in dollar value to what we buy from them. a sliding scale tariff would be a good start. bush 41 made Kuwait, Saudi Arabia and Japan pay a total of over 50 billion dollars of our costs for the first gulf war. that should be our standard procedure whenever we are asked to defend rich nations or their interests.

2008 Oct 23 01:33 AM

[Urbane Gori...:]

xander... We have tried punitive tariffs and political pressure... And received nothing but bad results.

jegan ;-)

2008 Oct 23 11:37 AM

[carey_jim:]

If you haven't read Bad Samaritans by He-Joon Chang, you should:

www.amazon.com/Bad-Sam...

While it isn't clear to me that rational observation and discourse (in any walk of life) is helpful, (even in the financial world where our money is at stake) ....

.... if people would spend just a small amount of their time studying finance and economics, (and history and other things) after they leave college, instead of spending every waking moment watching their surround sound high definition wide screen virtual realty yahoo machines ...

... they would probably be a lot less happy and a lot more frustrated....

Keep the faith.

2008 Oct 23 01:33 PM

[Al-USA:]

Its a good book, Bad Samaritans by He-Joon Chang and recommended for the newer generation.

Back when I started college, 20 years ago, I came across a similar title but with a more political bent, "Democracy For The Few". After that, my view of capitalism was never the same. By the way, it is now in its 5th edtion (since 1988), imagine that... ;)

2008 Oct 26 04:00 AM