(GEORGE *is* an acronym, btw, for General Entrepreneurial Ordinally Rational Generating Economist.)

Thanks for your attention. And oh yes: nice article, Bob.

A great article on Mises.Org just got posted that pertains to your question.

Please see http://mises.org/daily/3499

This explains how similar ‘techniques’ were used in other places to cause housing booms. It was not just in the U.K. and in America.

This one was in Iceland.

And the article shows nicely how Central Bank policies were inextricably linked, fatally-so, even though none of them were enacted consciously or intentionally with any harm in mind.

Notice especially the focus of the article on capital misallocation (i.e., malinvestments), moral hazard, enticement of people to borrow to the hilt to buy houses, and the sad (implicit) participation of the Bank of Japan (again another central bank) in the creation of below-market cost of capital “money” which directly enabled the tragedy to unfold in Iceland.

None of these practices will stop until and unless Central Banks understand the harm they do with their manipulation of money. There is no cost-free way to obtain a free lunch. And yet the heads of Central Banks on the whole are oblivious to this seemingly obvious truth.

Their respective governments must come to an agreement to not allow any type of “beggar thy neighbour” policies that they currently tolerate from their respective Central Banks.

I did not respond to your second question:

“How come the housing bubble is global if it was Greenspan’s fault?”

It is not entirely global, but for sake of argument let’s say that it happened in more than 1 country. Your question BTW is similar to those who point out that the Housing Boom did not happen equally across all states in America — which is true. But that observation in no way frees Alan Greenspan from his culpability for the boom and subsequent bust.

To your point however, for example, certainly there are indications of housing booms in Ireland, Spain, and the U.K.

First there was IMO the same type of philosophical approach followed by other central bankers, most notably in the U.K. — there was none of the old “protect the value of the currency” mentality left. After all, we live in a world where the bywords are Expediency, Consequentialism, Ignorance, and Betrayal of Trust.

The other factor at play is that, until recently anyway, the U.S. currency has been a reserve currency that allowed U.S. central bank activity to influence the activities of other central banks and other economies.

When the Fed inflated he money supply and thus debased the American currency, the Chinese and Japanese (as just 2 examples) had to do the same thing — otherwise they jeopardized their own export-oriented economies.

And similarly with many other world economies — it was a ‘race to the bottom’ because if your country’s central bank did not print its own currency as quickly as the FED was printing U.S. greenbacks, your particular country’s currency would naturally appreciate against the other relatively more-quickly depreciating currencies. And so your country’s economy would be seen to possibly suffer just because your central bank was not as morally and intellectually bankrupt as the Federal Reserve was.

But most certainly, the housing boom (in the ROW = Rest of the World) was not caused by any “Savings Glut” where poor Chinese peasants, who typically save 40% of their income, should be blamed.

And even if Greenspan could not DIRECTLY be found culpable for the problems in other countries, the meetings that all the G-7, G-8, G-20, and so on, have year after year — and which are intended to “coordinate” a lot of macroeconomic “managerial activity” even if those managers have no good idea of whether what they are doing is helpful or harmful — would go a long way to explaining how such money-destroying ‘coordination’ spreads across the globe.

It did expand.

But lately more than ever!

Its expansion IMO now will prove to be utterly catastrophic!

How come the housing bubble is global if it was Greenspan’s fault?

Your synopsis is very good IMHO!

Sad to say, as a result of this “MONEYPULATION” the pain on Main is only just starting.

As The Daily Reckoning wrote: “This is a Balance Sheet Recession”. Assets go down in value, but debts stay the same, or even go up.

Given future-accumulating interest, debts get bigger.

With price and wage deflation (or just plain LOSS of wages), the dollars that are needed in the future, to be used to pay back the debt, will also be “dearer”.

Those dearer dollars would buy more goods in the marketplace.

But they will only pay off the same old amount of debt that was accumulated in the “good times”.

Says the grasshopper to the ant.

It is like government licensing just 7 auto repair companies and forbidding anybody to use any other repair shop. Government doesn’t need to regulate how these repair shops operate to hurt the free market.

It is exactly like Mises said. Every intervention causes a problem and that problem begs another intervention. Until you get full blown socialism.

The reason I ask this is that emerging economies did have a growing savings rate during the boom. The effects of these savings were mixed up with opposite fluctuations in developed countries. Yet it would be nice to know what a real savings glut in emerging countries-alone-would have done.

If there were an unanticipated change in savings vs consumption preferences of emerging economies-or in their natural interest rate-, what would the consequences be, ceteris paribus? Have proponents of the global savings glut theory offered such a narrative?

In fact, I am puzzled by the idea that if our friendly Chinese neighbours decide to save more, this can cause malinvestments for us and for them. Unless markets are totally blind, and incapable of correct expectations and even incapable of reacting to a change in preferences, I don’t see how it could cause such a crisis.

“This was a completely accidental, avoidable, and unnecessary recession-depression. This was madness”

I agree 100%. By nature I tend to be suspect of the “savings glut’ theory, but I can’t claim to fully understand all the factors at play and therefore hesitate to make any firm statement one way or the other.

My understanding of the anti-savings glut argument is this:
1. The Fed lowered interest rates below the natural rate
2. With the “extra” dollars, U.S. consumers went on a buying spree that included significant purchases of Chinese goods
3. In addition, U.S. investors poured money into China
4. To offset these inflows of dollars in order to keep their currency cheap relative to the dollar, the Chinese gov’t printed RMB to purchase dollars from Chinese businesses.
5. The Chinese gov’t then used these dollars to buy U.S. bonds, thus in a round-about way helping the U.S. Fed in its low interest rate policy.

Is this accurate?

You first wrote:

“First, by keeping its currency cheap relative to the dollar (and hence other currencies), China is basically giving the U.S. cheaper goods at the cost of its workers and poorer citizens. Their wages and savings are not worth as much as they would be if China allowed a truly floating exchange rate – imports are more expensive and domestic goods don’t face competitive pricing pressures from imports.”

Agree 100% with the above comment. My point was that without allowing ‘normal’ real-time adjustments to trading-partner currency exchange rates — or use of a one-common worldwide currency [scary] — one side can take advantage of the other, perhaps even to the extent of harm to BOTH parties.
And perhaps, as we seem to be seeing today, to the extent of a worldwide financial meltdown. The Money System is breaking down. The signals the system used to give as guidance are pointing south when they should point north. This is a compass gone awry.
You properly point out that this is at a very real cost to the Chinese workers — no argument there. If it serves the “greater good” of China (in her masters’ opinions) what of those poor workers? Does the ruling class care?

But it is also at a very real cost to America’s manufacturing infrastructure and to America’s workers. No Chery car company worker being paid 80 cents an hour is overpaid — but no American auto sector worker who used to make wages (including benefits) 2 orders of magnitude greater than that Chinese wage is going to long be able to compete. Once the Western plants are dismantled, who will rebuild them — even if Chinese wages, artificially suppressed until then — are subsequently allowed to rise?

Secondly, you wrote:

“Second, if unemployment increases in the U.S. due to loss of jobs to China and other emerging markets, this should drive down U.S. wages. As wages decrease, businesses will hire more workers. In addition, cheaper labor makes it possible for new businesses to come into existence, as their costs are less. Yes, there would be an adjustment period, but in the end, the U.S. benefits – cheaper goods from abroad, cheaper domestic goods, and new products and services from new businesses.”

This is the same as your first point, from a different perspective. I don’t disagree with your observations, as before, since there is nothing materially incorrect in your statement IMHO.

The problem is this. Would all this evolve within a real money system (for sake of argument use some hypothetical gold-based system, or one-world currency system) then there would be no unnecessary disruption or “adjustment period” as you refer to it.
Yes, the various economies would gradually approach each other over time, in their respective performances, with each using their own national skills and relative advantages to bring novel and great goods and services at the best prices to market.

But what happens today? We are living through a major crash. This is not an adjustment that I think can be considered good or desirable. It is wasteful, needlessly disruptive, and harmful to all people.

This is the part of what might have happened [gradually] anyway that we don’t need. We do not need not only American auto workers to be unemployed, but Chinese ones as well.

This was a completely accidental, avoidable, and unnecessary recession-depression. This was madness.

And I also owe (Professor) John Succo and Mike Shedlock.

How, in light of their tour de force (back in December 2006), can Bernanke continue with his “Global Savings Glut” fiasco of an “explanation” for low interest rates?
This amounts to Doctor-of-Federal-Reserve malpractice!

Now I can more easily understand why Dr. Bernanke persists with his “lessons learned” from the Great Depression. At least he is consistent — consistently wrong.

He thinks the poor people in the Great Depression did not spend enough because they somehow knew that a dollar next year would be worth more than this year (=price deflation). He believes that he can force aggregate spending UP à la Zimbabwe with dollar depreciation (monetary inflation). He believes that those once-again-forced-into-buying consumers will then buy the ‘right things’ like cars, houses, furniture, appliances (and keep GM etc. in business) — instead of buying freeze-dried food, underground bunkers, guns, tillers, seed stock, fertilizer, home generators and wind turbines and solar arrays, and toilet paper.

Mike Shedlock’s post is a wonderfully lucid exposition of the problem.

AND it was written well BEFORE this imbroglio we find ourselves in.

I would STRONGLY urge all our posters to read that one article.

The fact is that this is MANIPULATION. Yes, it is not explicitly agreed to ahead of time by the FED and its Asian (and other) trading-partner counterparts, but it is “MONIPULATION” — sorry, could not resist — just the same, that leads to hugely damaging imbalances (from the Austrian point of view, and from the point of view of Reality Herself).

John Succo clarifies Ben Stein’s muddled take on this “glut”.

Dr. Succo also points out the flaw in thinking that this process is cost-free. Because it is not. He points out the future-coming (back then) correction in both the debt and derivatives markets.

Let’s repeat one more time for Dr. Bernanke’s benefit — there are NO POOR PEASANTS in China or anywhere else that are causing a SAVINGS GLUT. Most certainly not a glut of savings that then flows back into America.

It is the CB-s in those countries that are printing local paper money with which to buy up surplus U.S. dollars and then using those dollars to buy U.S. Treasuries. Got IT? If not, please read the last few sentences OUT LOUD in front of the mirror at least 10 times — I guarantee that you will then GET IT!

And then repeat to yourself 10 more times in front of your mirror after your shower the following few phrases:

“It is the fiat (debt-paper) currencies that all countries today operate with that is causing all of my freakin’ (and our) problems.”

“O-MI-GOD!”

“In the absence of any supervisory-role played by an impartial arbiter like gold — or by any similarly-equivalent role played by some international, supranational, overriding controlling body of rules, mechanisms, and institutions — we will NOT be able to PREVENT this maelstrom of events from happening AGAIN!”

I can just see poor Ben running down the street (naked) yelling “By God, I’ve GOT IT! — EUREKA! EUREKA!”

Cheers to all, I’ve certainly enjoyed the exchanges.

Of course what we can now expect to see is a further expansion of government regulation, including more extensive reguilation of the rating agencies, to “cure” the problems created initially by FDIC deposit insurance.

First, by keeping its currency cheap relative to the dollar (and hence other currencies), China is basically giving the U.S. cheaper goods at the cost of its workers and poorer citizens. Their wages and savings are not worth as much as they would be if China allowed a truly floating exchange rate – imports are more expensive and domestic goods don’t face competitive pricing pressures from imports.

Second, if unemployment increases in the U.S. due to loss of jobs to China and other emerging markets, this should drive down U.S. wages. As wages decrease, businesses will hire more workers. In addition, cheaper labor makes it possible for new businesses to come into existence, as their costs are less. Yes, there would be an adjustment period, but in the end, the U.S. benefits – cheaper goods from abroad, cheaper domestic goods, and new products and services from new businesses.

http://globaleconomicanalysis.blogspot.com/2006/12/global-savings-glut-revisited.html

China is only the most egregious (recent) example of the manipulative practice of subsidizing these exporting countries’ export sectors with “goosed-up” local economies using currency controls. And using “dirty-float”exchange controls…

And using import restrictions — whether “dirty” or legal. And using ownership “sharing” arrangements where local companies get the technical skills and trade knowledge, and jobs and manufacturing secrets from the offshore investing countries — most often America. That’s when their “industrial espionage” spies are not getting those secrets for them.

How many times have you read of an American being laid off who then has to earn his or her layoff “bonus” by training the offshore worker who is taking that job. But we have always been told that we need to compete better, more intelligently. On a level playing field, that makes sense.

We are to blame somewhat of course — we have allowed such offshore countries to fatten us up — we don’t save — we buy on credit. We also have gotten used to having cheaper goods come to us from offshore where quality is comparable… and Wal-Mart is our enforcer for that quality in a lot of cases. And maybe we have gotten a little lazy on the innovation side as well.

But there is a cost to that convenience of lower prices. Where the level playing field does not exist, our workers suffer. While I believe in (fair) free trade, and am a fiscal and financial conservative, I cannot see how destroying middle class jobs does us any good.

It is my position that the U.S. Treasuries (later purchased by these countries for the surplus U.S. dollars they have “earned”) are thereby accumulated by these other CB-s and their governments in a “dirty” and unfair manner.

The resulting imbalances are enormous. There has been some small justification for keeping such reserves, but only within reason. The exporting countries claim that otherwise there can be runs on their own currency. That offshore investors can repatriate “hot money” and cause their economies to suffer. That these surpluses are just “buffer” amounts to protest their own interests. To mitigate problems when hot money (especially the reserve American money) wants to go home.

Japan has followed a similar policy for years. I think that Japan is now in a dilemma partly of its own making. So imbalances do cause problems. If the U.S. cannot buy from Japan and China, and (as it appears) those countries are not YET ready to decouple themselves from American trade, so as to survive with trade amongst each other, then, yes, some of their difficulties are indeed homegrown.

An argument is often made (by those countries) that they are “only building up” their export sectors and one day, soon, they will “normalize” their control of their currency rates — and that they will “normalize” their trade with America. I’m still waiting for that “normalization” day in the case of Japan. Sure as they get richer they import a lot from us. But don’t think for one moment that they do not very critically watch to ensure that they always continue to run surpluses with us.

To Jeremy — thank you. I am not an expert on China. But what I have read leads me to believe that there are ENORMOUS malinvestments. Empty condos. Soon, many more empty factories. I once read that something like 70% of ALL Chinese jobs are totally dependent on the export sector. And today, China itself is losing jobs to Vietnam, which relative to China, is playing the same game — initially with even cheaper labor.

One good article (if it is not now “access protected for subscribers”) can be found at http://www.theglobeandmail.com/servlet/story/LAC.20081108.STBUYSIDE08/TPStory/TPBusiness/

This article in the Globe and Mail, by AVNER MANDELMAN from November 8, 2008, states among other things:
“Despite the [very small] town’s size, it sported dozens of condo towers and a posh hotel. And so, to celebrate the completion of the project, the Canadians went to dinner at the hotel’s restaurant with the local bigwig (the son of an army general), who, by the way, also owned the hotel and condos.
“They were the only diners present – the hotel was empty and dark, the condos emptier and darker. But there were lots of staff members, and during dinner the bigwig kept complaining that the Beijing bank that lent him the construction money was suddenly demanding interest. The cheek! How could one keep restive peasants employed if one had to pay interest?
“My e-mailer noted wryly that all over China there are many such empty hotels and condos – and factories too – built with loans to the well-connected and intended to maintain employment, but also (allegedly) to allow loyal bigwigs to enrich themselves.
“The economic value of such enterprises is, of course, zip, yet the “loans” are carried on the books of Chinese banks as good ones – just like U.S. mortgages to shirtless Joes and Janes were carried on Freddie Mac’s and Fannie Mae’s books before the mortgage corporations blew up. And, yes, just like loans to Sony or Sumitomo were carried by Japanese banks in the 1990s before the Japanese economy blew up.
“And, similarly again, just as everyone in Congress knew that Freddie and Fannie would soon come to grief – or just as everyone in Japan in the ’90s knew that most corporate loans were unpayable – the same is known in today’s China. Yet most China bulls in the West maintain that the country’s growth has merely slowed temporarily and will soon resume.
“Will it? Not according to my informants. China, they insist, is like Japan of the ’90s times three; it is Nortel writ large, maybe even Russia before the 1988 upheaval. You think this is extreme? Think again. Just last week Chinese Premier Wen Jiabao finally admitted that slow growth could risk “social stability.” Slow growth? How about no growth? Or even negative growth? It’s coming, and here’s why.
“You see, China, like Nortel and Japan and Soviet Russia, has been selling most things below true cost – which is the direct cost of production plus the cost of capital – and thus lost money on much of what it produced, and so destroyed much of its capital. A company that does so must eventually lay off workers and go bust. China, in my opinion, now faces similar risks, which Mr. Wen finally admitted.”

Once again you have clarified what was undecipherable. Just when I was ready to give up and blame it all on animal spirits!

Since the dollar is the reserve currency of the world, every other CB in the world inflated using the FED created dollars.

It is like fractional reserve banking, where every other CB has reserve requirement to keep dollars and for each dollar they can inflate their own currency even more.

This is bigger than 1929 because the inflation of the dollars screwed up the capital structure of the whole world not just US or even Chinas.

With this much inflation all over the world it is almost impossible to say what is real saving and what is inflation. And that is the main problem isn’t it?