13 May 2011

Dread at the CFA

Last week the CFA institute held its annual gathering in Edinburgh (see above) to discuss the future of investment. The CFA is a global organization of investment professionals that bestows credentials and disseminates analysis through the world of investors and investing firms. It's kind of like the global bar association for financial analysts, and it's surprising that there aren't more cooky conspiracy theories about it.

I haven't dug into what happened at the conference yet, but it looks pretty grim. I'll try to see what I can but I wanted to post the Financial Times's video, which gives a gloss on the mood. In short: we're screwed. But the reasons why warrant further analysis:

One of the most interesting comments is regarding the possible changing relationship between monetary policy and emerging markets. Code for US-China economic relations. The claim is that emerging markets have been making their policy based on the US Fed to ensure stable exports to the US. Whereas the US controls inflation through interest rates at the Fed (which in turn control bank lending and thus access to capital), China has controlled inflation through their interest rates but also through artificially devaluing their currency, pegging it to the US dollar. In order to do this it has needed to buy US Treasury bonds and thus has supported the growing US debt in such a way as to keep neoliberal American hegemony alive.

But the crisis has put pressure on this approach. A shock to commodity prices has come as investors bail out of currencies and bonds over fears of sovereign debt. This impacts Western economies but it impacts emerging economies all the more because of two things. First staple commodities, basic food and fuel, are a much greater part of overall consumption. This means that increases in staple commodity prices get passed on to consumer prices much faster. The second reason is that these economies have begun to reach the limits of their seemingly endless labor markets and as a result wages are rising, which in turn allows merchants to raise prices both because labor costs have risen but also because purchasing power is rising. This becomes a positive feedback loop and woosh! Food prices in Brazil go up by 10%.

Emerging economies need to do something about this, or they'll be in a host of trouble. The way they have been doing this seems to have bottomed out, buying US Treasury bonds is not going to stop this cycle. What this means is new ways to control inflation, possible currency valuation. This however would mean the end to China's strategic subservience to the Fed. In fact the Fed seems to have bottomed out itself in its ability to control the economy. Its last ditch effort, Quantitative Easing (effectively arbitrarily raising the money supply) has failed to create lasting effects and was only a band-aid over a wound that will not heal itself.

A transition of monetary leadership on its own does not amount to a structural reconfiguration of capitalism of the kind this crisis calls for. But it surely will not come on its own, and will provide crucial constraints on what the new system looks like. For all its decentralizing effects, neoliberalism ultimately rested on American and Western hegemony. What will an overcoming of neoliberalism be that is either more diffuse or in the hands of openly authoritarian regimes like China or Singapore?


  1. China, yes, but why throw Singapore in right at the end?

  2. I'm going to be honest. I don't know how singapore's economic growth works. To me they are an icon of authoritarian capitalism, so I threw it in as a gesture to that general dynamic, but I don't have a real argument to back it up. Does anyone know more about their situation? Does it break from the trend I'm talking about?

  3. You're absolutely right to highlight the importance of China's purchasing of US debt as a key prop of global neoliberalism up to the crisis (Japan served a similar role and occupied a position nearly as large). We can understand this as another example of issuing debt to paper over the widening gap between purchasing power and total production that I analyzed earlier.

    There have been continuous concerns thruout the crisis that China would stop financing US debt, precipitating a collapse of the dollar and the global economic system as a whole. Thus far, the fear has been unfounded (take a look at this chart). This is yet another example of how the contradictions of neoliberalism have been maintained intact by the response to the crisis, rather than resolved by it.