2017 Bubble Conference

Papers & Resources for the 2017 Leir Bubble Conference

About The Housing Market and Shadow Banking Sector in China by Zhipeng (Alan) Yan, NJIT
China’s shadow banking sector is likely to face greater regulatory scrutiny in the near- to medium- term. Whether it is a ticking time bomb remains to be seen.

The End of the Bretton Woods International Monetary System by Edward M. Truman, Peterson Institute for International Economics
This paper examines two episodes of international economic policy coordination: the efforts to modify the Bretton Woods international monetary system in the 1960s and early 1970s and to reform the system after the closing of the US official gold window on August 15, 1971. The paper examines the diagnoses of the problem in each episode, the treatments applied, and the results in the short run and longer run. In the short run, both episodes were failures. The international monetary system that emerged in the mid-1970s, while less systemic than some would like, has nevertheless stood the test of time, although proposals for its reform continue to be discussed.

Thoughts on the US External Deficit by Edward M. Truman, Peterson Institute for International Economics
The US current account deficit is largely due to the low and declining level of US national saving.  Exchange rates and the exchange rate policies of other countries have had marginal effects on the US external position over the past almost four decades.  The accumulated deficits and the build-up of net foreign liabilities could become a problem, but only if US economic and financial policies cease command the confidence of the rest of the world.

Three Points on the International Monetary System by Joseph Gagnon, Peterson Institute for International Economics
Financial markets are not efficient. They do not equalize rates of return across assets or countries. They are subject to fads and herd-like behavior. They allocate large amounts of capital in one direction and then reverse course suddenly, imposing substantial dislocations and adjustment costs.

Consequently, flexible exchange rates are not shock absorbers. Rather, they allow inefficient markets to inject noise into an important economic price (Flood and Rose JME 1995). This is why fixed exchange rates have an enduring appeal to many people.

The opening of capital markets in recent decades has vastly increased the flows of capital across borders. This poses problems for both fixed and floating rate regimes.

The China Problem by Peter Garber, Deutsche Bank
Domestic savers have been attracted with high yielding wealth management products pumped out by the banks as interest rate ceilings have been removed.
In turn, these instruments have financed ever more housing construction, now in secondary and tertiary cities.  Much of the housing purchases is speculative, so this looks like a bubble.  But the investment effort in housing does fit in with a government plan to move hundreds of millions more people from the country to the cities.  If only these new migrants can be as productive as the preceding waves of migrant labor, perhaps the scheme can pay for itself ultimately. 

The US Current Account, The Savings Balance, and Dutch Disease by Daniel Gros, Centre for European Policy Studies
Differences in savings, rather than investment rates, appear to be the longer run drivers of current account imbalances even if these variables are measured with considerable margins of error.  There does not seem to be a link, at least at the aggregate level, between the current account and manufacturing employment, which has declined at similar rates in the US and Europe over the last two decades (with very different current account developments).  Rising US production of commodities might have exerted an additional influence on manufacturing employment, which was absent in Europe.
What I will not address is the puzzle why US (and in general Anglo-Saxon) savings have diverged from the rest of developed countries, although capital markets are increasingly integrated and interested rates have followed almost everywhere a very similar trend downwards.

Selections From Bergsten-Gagnon Book by Fred Bergsten & Joseph Gagnon, Peterson Institute for International Economics
The simple elasticities model explains how exchange rates and GDP play key roles in determining the current account balance. However, the model reflects only part of the workings of the economy. In a broader model of the overall economy, the current account has important effects on the exchange rate and GDP.

Chinese Surpluses & Currency Valuation, 2004-2017 by  Jeffrey Frankel, Harvard Kennedy School
• The RMB was undervalued in 2004-08 by all three kinds of measures (very rare!): 
  1. prices were low, even adjusted for income/cap; 
  2. the trade and CA surpluses reached high levels; 
  3. FX reserves were rising, reaching world-record levels. 

 • China had adjusted by 2014: 
  1. RMB, wages & prices rose => undervaluation ended. 
  2. The trade surplus peaked in 2007 at 7% of GDP,  •then came down to 2% of GDP. 
  3. Reserves peaked in 2014, then fell.


Trade Imbalances and Manufacturing Jobs: A Macro View by Nick Sargen, Fort Washington Investment Advisors
One of the hallmarks of Donald Trump’s theme of America First is the need to restore lost jobs in manufacturing owing to unfair foreign competition.  During the presidential campaign Trump criticized NAFTA and the Trans Pacific Partnership (TPP), and he threatened to impose heavy duties on imports from China, Mexico and other countries that are deemed to harm American workers. This stance raised alarm bells among investors who were concerned it could lead to protectionism.  However, most have adopted a wait-and-see posture, presuming that Trump’s harsh rhetoric is a ploy to negotiate more favorable trade arrangements for the United States.      

Economic Booms With & Without Capital Controls: A Case Study of Iceland by Gylfi Zoega, University of Iceland and Birkbeck College, London
Two economic booms:
2003-2008:  
Interest rates raised to stem domestic demand but free flow of capital and foreign currency borrowing allowed. Banks required to have an FX balance on their books.
2010-2017:
Interest rates raised to lower the growth of domestic demand and increase domestic savings but capital controls imposed. Capital account closed until 2016 and an “Aliber tax” imposed in June 2016 (foreign residents have to deposit 40% of investment in domestic bonds into an interest-free account at the central bank).

The U.S. External Payments Position:N-Propositions by Robert Z. Aliber, University of Chicago
There was a major climacteric in international payments around 1980, the previous counterpart was about 1915. Before 1915, there was an excess supply of U.S. securities; this shift was to an excess supply of non-U.S. securities.  The shift in the early 1980s was to an excess supply of U.S.  securities.  The identity of the excess supply has no implication for the shock that led to the change in the pattern of payments.   

Sketch of a Theoretical Case for Protectionism Richard Robb, Columbia University
While we are currently experiencing a global bull market in protectionism, tariffs and trade barriers have long held political appeal. Could this be a widespread failure to grasp David Ricardo’s 200-year-old story1 of the Portuguese wine marker and English cloth maker in which both countries benefit from opening up to trade? The English vintners and the Portuguese weavers may not benefit, but the gains from trade are large enough to compensate the losers so that everyone ends up better off. But many sophisticated politicians who are familiar with this theory still support trade barriers. Perhaps they’re pandering to confused constituents, or concerned that not all the losers will be compensated by redistribution. However, these explanations fail to account for the persistent, strongly felt opposition to free trade over time and across countries. These days aversion to trade even extends across parties, as it is embraced to varying degrees by both the left and the right. No matter which way we turn, neoclassical economics cannot provide a robust argument for protectionism.

The US Current Account Deficit Problem by Jeffrey Shafer, Princeton University Woodrow Wilson School
Monetary policy through asset prices drives saving as well as investment (r=.73)

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