Ain't Nothing Free

Not that this will come as a surprise or anything but; Bush Wrong at UN on Benefits of Free Trade

“In the long run, the best way to lift people out of poverty is through trade and investment,” Bush said. “During the 1990s, developing nations that significantly lowered tariffs saw their per capita income grow about three times faster than other developing countries. Open markets ignite growth, encourage investment, increase transparency, strengthen the rule of law, and help countries help themselves.”

As in so many of his other pronouncements, he’s wrong.

In the past few decades, as the gospel of free trade has spread, growth in the developing world has actually slipped. Mark Weisbrot, Dean Baker, and David Resnick of the Center for Economic Policy and Research (an organization that does great work in demolishing conventional shibboleths) have done research that reveals quite the opposite of what Bush contends.

“Contrary to popular belief, the past 25 years (1980-2005) have seen a sharply slower rate of economic growth and reduced progress on social indicators for the vast majority of low- and middle-income countries,” their paper says.

In a little-noticed portion of his speech to the United Nations on September 25, President Bush repeated a favorite hymn of his.

“Overall, in the 1990s gross domestic product (GDP) per capita grew by 1.6 per cent a year in developing countries,” says the United Nations Population Fund, buttressing the CEPR analysis. “But these slow gains were unevenly distributed. The per capita GDP growth of the poorest countries in the 1990s was slower than in the 1980s.”

Bush doesn’t believe the folks over at the Center for Economic Policy and Research? How about Joseph Stiglitz, Nobel Laureate in Economics, onetime chief economist at the World Bank, and the former chair of the Council of Economic Advisers?

“The sad truth, however, is that outside of China, poverty in the developing world has increased over the past two decades,” Stiglitz writes in his 2006 book, “Making Globalization Work.” “Some 40 percent of the world’s 6.5 billion people live in poverty (a number that is up 36 percent from 1981), a sixth—877 million—live in extreme poverty (3 percent more than in 1981).”

So, what works? Ha-Joon Chang, an economist of Korean origin teaching at Cambridge, provides some answers. In books such as “Kicking Away the Ladder” and “Bad Samaritans,” Chang demonstrates that what will succeed best for the developing world are strategies that helped the West in the past: an activist state engaging in a mix of policies to protect and encourage infant industries, rather than orthodox free trade.

But to listen to people like Chang, Bush would have to stop repeating, zombie-like, the free-trade mantra he carries around in his head.

Ouch.

Bling, Bling

Dollar Crunch Puts Gold Centre Stage

The dominoes are toppling. What began as a credit crunch has turned into a dollar crunch. We are witnessing a run on the world's paramount reserve currency, an event that occurs twice a century or so, and never with a benign outcome.

The US dollar has fallen through parity against the Canadian dollar and plummeted to all-time lows against a basket of currencies. This is dangerous. None of the mature economic blocs seems able to take the strain, let alone step in to restore order. Ultimately, Europe and Japan are in worse shape than the US. A mood of sauve qui peut is taking hold.

Is this what gold is sniffing as it breaks out against all currencies, smashing through €500 an ounce against the euro, and vaulting to a 28-year high of $743 against the dollar?

"Central banks have been forced to choose between global recession or sacrificing control of gold, and have chosen the perceived lesser of two evils," said Citigroup in a fresh report. This could take gold to $1,000 an ounce, or higher."

Until now, the euro has served as the "anti-dollar", the default choice for Asians and petrodollar powers wary of US assets. This cannot last. Eurogroup chair, Jean-Claude Juncker, has stopped pretending that all is well. "We have begun to have great concern about the exchange rate of the euro," he said.

Europe will not let America export its day of reckoning to the rest of the world. It will counter with its own devaluation.

No doubt Ben Bernanke will use all means to avert disaster, including the "printing press" he invoked in November 2002. By this he meant that the Fed could inject unlimited stimulus by purchasing as many bonds and assets as it wants. He believes the Fed could have avoided the Depression if it had been more creative in 1931. Even so, I am not sure that the Bernanke Fed will move fast enough, given fears of moral hazard, or, indeed, whether the rate cuts on offer are enough to head off an insolvency crisis. The chart of S&P 500 looks eerily similar to October 1987, the last time a tumbling US dollar set off a crash.

Large parts of the global credit system are still shut. The $2.2 trillion market for commercial paper has shrunk by $368bn over the past seven weeks as lenders refuse to roll over loans. The $2.5 trillion market for "structured finance" remains frozen.

We wait to see what happens as "teaser rates" on some $1.5 trillion of mortgages jump with a venomous kick in coming months. The Fed should have thought about this three years ago when rates were 1pc. It is too late now.