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32 of 32 people found the following review helpful:
4.0 out of 5 stars
Nobody does global flows better, October 28, 2008
This version (i.e., Forum on Constructive Capitalism) might be different than Mr. Wolf's yet-to-be-released book of the same name. I don't know. But, regardless this an eye-opening book. Previously, I have studied the US credit crunch from a retail/Wall Street perspective: that is, subprime loan originations and securitizations. Before Mr. Wolf, I understood the crisis as an utterly avoidable debacle triggered by greed and enabled by certain financial instruments.
But the book opened my eyes to larger forces at work in global finance. Sort of like, if i before saw the crisis as an inept swimmer drowning, now I see the swimmer as more of a victim caught up inexorably in a powerful undertow beyond his control. To see it his way, there was a degree of inevitability due to unsustainable imbalances. Mr. Wolf is absolutely expert on the dynamics of international capital flows. A good portion of the book makes vivid something he covers in his columns: the U.S. has been the world's "spender and borrower of last resort;" okay, you knew that, but the breakdown between government, companies and households is where it gets scary. While the US government used deficits to spur demand (and absorb other countries, like China's, excess savings), US households went into an unprecedented deficit. Our problem is that our current account deficit is met with excess spending rather than investment. Mr. Wolf has great charts in the book to illustrate this perfectly; a few of his simple line charts elicited a visceral reaction for me (fear, specifically).
Also, for those who haven't read Mr. Wolf before, he is the consumate professional giving counter-arguments their just due. You learn just as much while he's weighing the idea he doesn't agree with. But by the time I was done with it, he had convinced me formally around a nagging suspicion: that the U.S. has been reacting to global patterns as much as instigating them (i.e., that our Fed and policy makers aren't all powerful - he even dubs them "victims" in some respects).
I gave it four stars only because the book was tough work for me. For a trained economist (not me, I am a financial analyst), probably it deserves five stars. I needed extra time and a macroeconomic reference to sort through some of it. (that's why i remove one star. If you are going to make me break out Mankiw's macroecon text to keep pace, i am going to have to ding you!). It looks harmless, without equations and such, but it's way dense. This is one of those that books that is easy to buy but hard to read all the way through. So, the four stars is only for the time it required on my part. I would not exactly call it accessible. But Mr. Wolf is a national treasure.
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6 of 6 people found the following review helpful:
3.0 out of 5 stars
Inaptly titled, excellent discussion of the US current deficit phenomenon, February 19, 2009
This book really isn't about fixing global finance. In fact, the author dedicates less than 10% of the book to that prospect and his solutions, rather blithely stated are for 1) developing countries to reform their economic governance so that they can issue own-currency debt (or the pie in the sky fix, to do away with single sovereign currencies); and 2) the IMF specifically and world economic organizations generally to reform themselves (the pie in the sky solution being that participating countries pool their reserves).
Well, golly (long golly ala Gomer Pile) you just done fixed global finance, Sarge!
Thank you, but I think we already know what economic Nirvana looks like and hoped for something other than nostrums as fixes, something like concrete suggestions, say.
Alas, I know, the task is too big for a single man and as such perhaps you may be allowed to take a pass on even attempting to tackle the problem right here and now, Mr. Wolf....but then there is the little issue of the title of the book. H'mmm.
No, this book is more interesting for its extended discussion of the various schools of thought surrounding the phenomenon of the US Current Account deficit. In other words, how the various schools explain the reason for it, and whether it can continue to grow or even remain the same size. The author's discussion of this is mostly transparent and always lucid even if it does take a bit of getting through at times. Reading it will definitely give one a more complete appreciation of what the phenomenon is and how it is caused, if not, perhaps, the exact reasons for it.
In short, it seems that developing countries are willing to lend the US money at very poor rates of return (good for the US) because they have an aversion to undertaking 'hard currency' debt thereby facing the potential for disaster if currency fluctuation or other large scale economic events occur which cause them to default.
The way out of the problem is for them to reform their governments and for the IMF and World Bank to reform themselves and allow developing countries a greater say in how these organizations dispense monetary aid.
One wonders if the author rushed this book out before the full effects of the presently unfolding crisis began to be felt. For, by doing so the book was published at a time when it was still relevant. As it is, the entire discussion has been rendered moot by events.
In fact, now developing countries are buying USA's debt for an entirely different reason than any mentioned by Mr. Wolf: They fear global depression, and our currency is considered a safe haven.
I'd wager that if Mr. Wolf were to begin his book today, it would have some discussion of the necessity of forming a new kind of 'gold standard,' perhaps that single currency which he hinted at but didn't spend much time on.
Indeed, things have changed so radically since the recent publication of this book that it should only be read by those who want to know what the various schools of thought said about the creation of the current account deficit of the USA prior to 2008.
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11 of 13 people found the following review helpful:
5.0 out of 5 stars
Best analysis of international capital flows, January 8, 2009
This book has almost nothing to do with the current housing and credit crisis. Wolf only says in the last couple of pages that part of the world savings glut was recycled in excess US residential investment. And, that's it. If you are interested in studying the current crisis I recommend instead those two excellent books: The Two Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash, Manias, Panics, and Crashes: A History of Financial Crises (Wiley Investment Classics), and to a lesser degree The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It.
Martin Wolf excellent analysis focuses on capital flows. He observes that the global savings glut generated by huge Current Account Surplus (CAS) from Asian exporting countries is matched by the US Current Account Deficit (CAD). He advances that if not for the US ability to absorb excess savings, the World economy would be in a recession. That's why he calls the US the borrower and spender of last resort. Wolf supports this savings glut theory by stating that:
1) Asian countries pegging their currency level is an explicit policy choice to boost exports;
2) US money supply growth has been reasonable; and
3) US Inflation and inflation expectation are low.
Martin Wolf explains how Asian countries came about to generate such huge CAS. Since 1980 emerging markets suffered many financial crises with huge fiscal costs ranging from 10% to 55% of GDP. Those crises were due to large foreign debt. When such countries Current Account Deficit (CAD) increased, their domestic currencies plummeted. And, they defaulted on their exploding foreign debt. If a currency devalues by 50% a country's foreign debt doubles! In response to the 1997 currency crises, Asian countries eliminated foreign debt by managing their currency exchange rate at low levels to stimulate exports. This resulted in their building huge foreign exchange reserves and CAS. China has $1.2 trillion in foreign exchange reserves and a CAS of 12% of GDP. Other Asian and oil exporting countries espoused the same policies to eliminate foreign debt.
These emerging markets policies have caused a global imbalance of capital flows from poor countries to rich ones. Given that the EU is a protectionist trade block, the world savings glut flows to the US.
The US is now the borrower and spender of last resort. Its huge financial markets combined with strong consumer demand absorb 70% of the world savings glut. The US Current Account Deficit (CAD) equals 7% of GDP. Such a large CAD is not worrisome since the US borrows in $. The US has benefited from foreign capital by maintaining high domestic investments despite low domestic savings.
Wolff is concerned about the US CAD sustainability. He notes that between 1992 and 2005, the financial balance of the household sector moved from +3.7% to - 3.6% of GDP due to a decline in personal savings from 7.5% to 2.5% of GDP and an increase in residential investment from 3.7% to 6.1% of GDP (the housing bubble). Since the 80s, US household debt nearly doubled from 70% to 135% of disposable income. But, because of declining rates debt service has increased moderately from 10.5% to 14.5% of disposable income.
Many economists believe the US CAD is unsustainable. If an economy runs a CAD of 7% of GDP and grows its GDP by 5% nominal, its net external liabilities will equal 140% of GDP. These economists believe the $ would have to depreciate by 30% for the CAD to shrink back to 3% of GDP. Such a depreciation could entail a run on the $, higher rates, and a recession. They also consider the US CAD unsustainable because it results in foreign countries amassing huge levels of $ and large related foreign exchange losses. Also, foreign exchange interventions by foreign central banks can cause inflation, excess credit, asset bubbles, and financial collapse.
Fortunately, the case for US CAD sustainability is good. Richard Cooper from Harvard states that excess savings in the rest of the World are permanent due to demographic trends (low birth rate, aging societies in Japan, Germany, China). He adds that the US generates close to 30% of the world GDP and 50% of the World financial securities. Thus, it is reasonable for the World to invest its surplus savings in such a dominant economy. Cooper adds that if the CAD continued at $600 billion while the US economy grows at 5% nominal, the ratio of net foreign claims to GDP would stabilize at 50% and the CAD would fall to 2.5% of GDP within a few years. Also, the impact of the CAD is moderated by the depreciation of the $ and the US higher return on its foreign investments vs foreigners returns on their US investments. The US higher return is because its investment mix is tilted towards direct investments while foreigners' are tilted towards Treasuries. The US CAD is also sustainable because Asian governments willingly incur fx related losses on their reserves to promote exports.
Wolf in his concluding remarks suggests that China needs to increase consumption lower excessive savings (near 60% of GDP) and reduce its CAS (12% of GDP). The US CAD should decrease but not disappear as it absorbs demographics related excess savings from Japan, Germany, and China. Emerging markets need to upgrade their financial system to make it safe to lend and borrow in their domestic currency to avoid the foreign exchange crisis of the past.
Smick in his excellent The World Is Curved: Hidden Dangers to the Global Economy has a pessimistic view regarding China undertaking the reform Wolf recommends. Thus, trade and capital flows imbalances are likely to remain with us for a while.
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