I've been using Voice over IP for some time now. I talk to my physics collaborators in foreign countries using a free service called Skype, which runs on my laptop. The sound quality is incredibly good - often better than an international call on the telco system. The free service is only for PC to PC calls, but you also can terminate the IP connection on the old telco system to reach an ordinary phone for a small fee (about $.02 per minute for Skype, if I recall).
The economics of VOIP are a little opaque to me - some of the cost savings is due to the lack of regulatory fees on IP telephony. (When I look at my QWEST phone bill I am astonished at how much of it is taxes and regulatory fees.) But there is certainly a big advantage to using a packet-switched network instead of a circuit-switched one, once the quality issues are solved. Telephony will soon be priced like bandwidth.
I predict a huge wave of innovation around VOIP. The fundamental unit of the Internet revolution - a linux or BSD server, built from cheap hardware - can now use open source software (e.g., the Asterisk package) to perform PBX functions and voice-data manipulation. That means much of the expensive telco equipment that Alcatel or Siemens or Nortel sell is going to be commoditized in the coming years. Cisco and others are already moving aggressively into VOIP, although penetration rates in both the consumer and Enterprise markets are still very low. As always, the real innovation will come from small startups. It seems to me that the easiest way to roll out low cost Internet-related services and applications to cellphones is via VOIP, rather than depending on 3G. The user I/O is limited to voice or touch-tone, but the connectivity is already there and no special handsets are required.
Saturday, November 20, 2004
Friday, November 19, 2004
Raw Data
From today's Financial Times:
...Within the US political debate, the administration often paints the current account deficit as a success story. The refrain is that the US has an excess of investment opportunities which foreigners want to use. That was true until 2000, when investment as a share of US GDP was growing. But since then the share has fallen and it does not explain the growing current account deficit. Rather, as the US government began to borrow heavily, national savings fell even faster, causing the current account to deteriorate further.
...Net capital inflows in the year to September, at $657bn, exceeded the $445bn trade deficit over the same period. But Ashraf Laidi, currency analyst at MG Financial Group in New York, points out that foreign demand for US assets has been falling. A year ago, the US was importing twice as much capital a month as it needed to cover the trade deficit. The gap has narrowed: the $63.4bn of capital imported in September compared with the $51.6bn trade deficit in that month.
Below you can compare US foreign debt levels to those of other countries during previous currency crises. It doesn't appear to me that we are near a catastrophic collapse in confidence in the dollar - the US is no Argentina, so perhaps the Sweden data point is most appropriate. That gives us a decade to get our finances in order. (On the other hand FT indicates the Norway point from 1977 - if that is a good comparator we will definitely see a crisis while W is still President.)
...Within the US political debate, the administration often paints the current account deficit as a success story. The refrain is that the US has an excess of investment opportunities which foreigners want to use. That was true until 2000, when investment as a share of US GDP was growing. But since then the share has fallen and it does not explain the growing current account deficit. Rather, as the US government began to borrow heavily, national savings fell even faster, causing the current account to deteriorate further.
...Net capital inflows in the year to September, at $657bn, exceeded the $445bn trade deficit over the same period. But Ashraf Laidi, currency analyst at MG Financial Group in New York, points out that foreign demand for US assets has been falling. A year ago, the US was importing twice as much capital a month as it needed to cover the trade deficit. The gap has narrowed: the $63.4bn of capital imported in September compared with the $51.6bn trade deficit in that month.
Below you can compare US foreign debt levels to those of other countries during previous currency crises. It doesn't appear to me that we are near a catastrophic collapse in confidence in the dollar - the US is no Argentina, so perhaps the Sweden data point is most appropriate. That gives us a decade to get our finances in order. (On the other hand FT indicates the Norway point from 1977 - if that is a good comparator we will definitely see a crisis while W is still President.)
Generalized Turing test
I have a bet with one of my former PhD students regarding a strong version of the Turing test. Let me explain what I mean by "strong" version. Turing originally defined his test of artificial intelligence as follows: a tester communicates in some blind way (such as by typing on a terminal) with a second party; if the tester cannot tell whether the second party is a human or a computer, the computer will have passed the test and therefore exhibits AI. When I first read about the Turing test as a kid, I thought it was pretty superficial. I even wrote some silly programs which would respond to inputs, mimicking conversation. Over short periods of time, with an undiscerning tester, computers can now pass a weak version of the Turing test. However, one can define the strong version as taking place over a long period of time, and with a sophisticated tester. Were I administering the test, I would try to teach the second party something (such as quantum mechanics) and watch carefully to see whether it could learn the subject and eventually contribute something interesting or original. Any machine that could do so would, in my opinion, have to be considered intelligent.
Now consider the moment when a machine passes the Turing test. We would replicate this machine many times through mass production, and set this AI army to solving the world's problems (and making even smarter versions of themselves). Of course, not having to sleep, they would make tremendous progress, leading eventually to a type of machine intelligence that would be incomprehensible to mere humans. In science fiction this eventuality is often referred to as the "singularity" in technological development - when the rate of progress becomes so rapid we humans can't follow it anymore.
Of course the catch is getting some machine to the threshold of passing the Turing test. My former student, using Moore's law as a guide (and the related exponential growth rates in bandwidth and storage capacity), is confident that 50 years will be enough time. Rough calculations suggest we aren't more than a few decades from reaching hardware capabilities matching those of the brain. Software optimization is of course another matter, and our views differ on how hard that part of the problem will be. (The few academic CS people who I have gotten to give their opinions on this seem to agree with me, although I have no substantial sampling.)
I'd be shocked if we get there within 50 years, although it certainly would be fun :-)
Now consider the moment when a machine passes the Turing test. We would replicate this machine many times through mass production, and set this AI army to solving the world's problems (and making even smarter versions of themselves). Of course, not having to sleep, they would make tremendous progress, leading eventually to a type of machine intelligence that would be incomprehensible to mere humans. In science fiction this eventuality is often referred to as the "singularity" in technological development - when the rate of progress becomes so rapid we humans can't follow it anymore.
Of course the catch is getting some machine to the threshold of passing the Turing test. My former student, using Moore's law as a guide (and the related exponential growth rates in bandwidth and storage capacity), is confident that 50 years will be enough time. Rough calculations suggest we aren't more than a few decades from reaching hardware capabilities matching those of the brain. Software optimization is of course another matter, and our views differ on how hard that part of the problem will be. (The few academic CS people who I have gotten to give their opinions on this seem to agree with me, although I have no substantial sampling.)
I'd be shocked if we get there within 50 years, although it certainly would be fun :-)
FX Angst at G20 meeting
The Economist covers the upcoming meeting of G20 finance ministers and central bankers. Who will be next (after Russia) to move to a reserve basket of currencies, shifting from dollars to euros?
...For a country such as South Korea, buying dollars is both costly and possibly inflationary. The country’s excess savings, parked in low-yielding American Treasuries, would earn a higher return invested at home. And the finance ministry’s weak won policy, by making imports more expensive, has hampered its fight against rising prices. In the summer, annual inflation reached its highest rate for three years, though it has since eased.
South Korea’s growing ambivalence about its won policy may be shared by the other post-crisis countries in the region. But their freedom for manoeuvre is limited by China’s dedication to its peg against the dollar. During the financial storms of 1997 and 1998, the peg provided an important anchor for the region. Even as currencies collapsed all around it, China refused to beggar its neighbours by devaluing the yuan. But China’s peg, a bulwark against the financial crisis, is now blocking the “reversal” of the crisis that Mr Jen foresees and the dollar needs. To its neighbours, China is such an important trade partner and competitor that they dare not let their currencies strengthen too far against the yuan. Even Japan is wary.
Much of the G20, then, is now waiting for just one of its members, China, to unpeg its currency. Some speculators can wait no longer. They are already swapping their dollars for yuan, betting it will soon jump in value. To deter such speculation, Chinese banks on Thursday raised the interest they pay on dollar deposits.
...For a country such as South Korea, buying dollars is both costly and possibly inflationary. The country’s excess savings, parked in low-yielding American Treasuries, would earn a higher return invested at home. And the finance ministry’s weak won policy, by making imports more expensive, has hampered its fight against rising prices. In the summer, annual inflation reached its highest rate for three years, though it has since eased.
South Korea’s growing ambivalence about its won policy may be shared by the other post-crisis countries in the region. But their freedom for manoeuvre is limited by China’s dedication to its peg against the dollar. During the financial storms of 1997 and 1998, the peg provided an important anchor for the region. Even as currencies collapsed all around it, China refused to beggar its neighbours by devaluing the yuan. But China’s peg, a bulwark against the financial crisis, is now blocking the “reversal” of the crisis that Mr Jen foresees and the dollar needs. To its neighbours, China is such an important trade partner and competitor that they dare not let their currencies strengthen too far against the yuan. Even Japan is wary.
Much of the G20, then, is now waiting for just one of its members, China, to unpeg its currency. Some speculators can wait no longer. They are already swapping their dollars for yuan, betting it will soon jump in value. To deter such speculation, Chinese banks on Thursday raised the interest they pay on dollar deposits.
Thursday, November 18, 2004
Russia moves to EUR FX basket?
OK, not quite an Asian central bank defection, but a major EurAsian one...
From a correspondent in finance:
The Nikkei news is reporting that from 2005, Russia's central bank will adopt a EUR-dominated basket peg for the RUB. The BoR does not have a formal USD/EUR basket, but has a notional basket containing a split of 70% USDs and 30% EURs which it uses when it targets trends in the RUB's REER. Its FX reserve composition tends to reflect this notional basket. The vast majority of FX intervention (roughly USD2bn a week) is conducted via the USD/RUB market given that EUR/RUB is illiquid. The BoR is believed to then convert roughly 30% of its incremental FX reserve growth into EURs. FX intervention in Russia is therefore positive for EUR/USD.
I should have bought more BEGBX!
From a correspondent in finance:
The Nikkei news is reporting that from 2005, Russia's central bank will adopt a EUR-dominated basket peg for the RUB. The BoR does not have a formal USD/EUR basket, but has a notional basket containing a split of 70% USDs and 30% EURs which it uses when it targets trends in the RUB's REER. Its FX reserve composition tends to reflect this notional basket. The vast majority of FX intervention (roughly USD2bn a week) is conducted via the USD/RUB market given that EUR/RUB is illiquid. The BoR is believed to then convert roughly 30% of its incremental FX reserve growth into EURs. FX intervention in Russia is therefore positive for EUR/USD.
I should have bought more BEGBX!
Dollar Loses Luster in China
It isn't just the hedge funds betting against the dollar (WSJ):
...From black marketers to anxious grandmothers, Chinese have become disenchanted with the dollar. The selling has posed problems for Beijing as it tries to keep the yuan pegged to the dollar, adding to pressure China is getting from its trading partners to revalue its currency.
The selling also signals a startling shift that may have damaging implications for the dollar down the line: Many Chinese view the yuan, also called the renminbi, as the safer currency to hold.
"The U.S. dollar is weakening! The renminbi is the hard currency now!" shouts a 40-year old man after pulling $10,000 out of U.S.-dollar-denominated stocks and plunking the sum into yuan deposits. "It's the best choice," he says.
...Meanwhile, China's central bank has scrambled to buy dollars from ordinary Chinese who are selling them, to the tune of $20 billion in the first six months, according to an internal report from the State Administration of Foreign Exchange.
A member of a black-market syndicate in Shanghai, a 35-year old surnamed Lu, says he is doing a booming business converting dollars to yuan... Because Mr. Lu and his colleagues are having a difficult time reselling the dollars, they have lowered their exchange rate below what the banks are offering for the yuan.
..."Hot money," or speculative capital, coming into China is pressuring the yuan. But the return of money through legitimate channels also suggests a rush back to China to bet on a stronger yuan. China's portfolio and other capital inflows stood at $36.3 billion in the first half of the year, a little more than double that of the same period of last year. China's foreign-exchange reserves reached $514.54 billion at the end of September, increasing by about $12 billion a month.
At a closed-door meeting in Shanghai this month, banking regulators expressed concern about these developments. "The exchange rate is facing a lot of upward pressure," said Wang Zili, the deputy director at the central bank's branch in the southern city of Guangzhou, according to the minutes of the meeting. "Foreign reserves are increasing too quickly. A lot of capital is coming in through the black market betting on the yuan."
...From black marketers to anxious grandmothers, Chinese have become disenchanted with the dollar. The selling has posed problems for Beijing as it tries to keep the yuan pegged to the dollar, adding to pressure China is getting from its trading partners to revalue its currency.
The selling also signals a startling shift that may have damaging implications for the dollar down the line: Many Chinese view the yuan, also called the renminbi, as the safer currency to hold.
"The U.S. dollar is weakening! The renminbi is the hard currency now!" shouts a 40-year old man after pulling $10,000 out of U.S.-dollar-denominated stocks and plunking the sum into yuan deposits. "It's the best choice," he says.
...Meanwhile, China's central bank has scrambled to buy dollars from ordinary Chinese who are selling them, to the tune of $20 billion in the first six months, according to an internal report from the State Administration of Foreign Exchange.
A member of a black-market syndicate in Shanghai, a 35-year old surnamed Lu, says he is doing a booming business converting dollars to yuan... Because Mr. Lu and his colleagues are having a difficult time reselling the dollars, they have lowered their exchange rate below what the banks are offering for the yuan.
..."Hot money," or speculative capital, coming into China is pressuring the yuan. But the return of money through legitimate channels also suggests a rush back to China to bet on a stronger yuan. China's portfolio and other capital inflows stood at $36.3 billion in the first half of the year, a little more than double that of the same period of last year. China's foreign-exchange reserves reached $514.54 billion at the end of September, increasing by about $12 billion a month.
At a closed-door meeting in Shanghai this month, banking regulators expressed concern about these developments. "The exchange rate is facing a lot of upward pressure," said Wang Zili, the deputy director at the central bank's branch in the southern city of Guangzhou, according to the minutes of the meeting. "Foreign reserves are increasing too quickly. A lot of capital is coming in through the black market betting on the yuan."
Wednesday, November 17, 2004
Wal-Mart and US-China trade
WSJ. Wal-Mart by itself accounts for more than 10% of U.S. imports from China... Wal-Mart is termed China's eighth-largest trading partner by the government-controlled mainland media and would place ahead of Russia and the United Kingdom on the top-10 list. Other published reports indicate Wal-Mart would be the fifth-largest importer of Chinese manufactured items if it were considered as a nation.
Since Wal-Mart doesn't produce anything for export, the large-scale importing contributes to the gap in U.S. trade. The U.S. is expected to run up a total trade deficit of more than $600 billion in 2004, with the deficit in its bilateral trade with China contributing $150 billion. Thanks mainly to the shortfall in merchandise trade, the U.S. current-account deficit is approaching 6% of gross national product.
According to Amy Wyatt, a spokeswoman for the Bentonville, Ark., retailer, Wal-Mart imported $15 billion in goods from China in the fiscal year that ended Jan. 31, 2004. About $7.5 billion were directly imported by Wal-Mart, the other $7.5 billion came indirectly through suppliers. In the same period, Wal-Mart's total net sales reached $256 billion, with roughly $209 billion coming from U.S. operations.
Since Wal-Mart doesn't produce anything for export, the large-scale importing contributes to the gap in U.S. trade. The U.S. is expected to run up a total trade deficit of more than $600 billion in 2004, with the deficit in its bilateral trade with China contributing $150 billion. Thanks mainly to the shortfall in merchandise trade, the U.S. current-account deficit is approaching 6% of gross national product.
According to Amy Wyatt, a spokeswoman for the Bentonville, Ark., retailer, Wal-Mart imported $15 billion in goods from China in the fiscal year that ended Jan. 31, 2004. About $7.5 billion were directly imported by Wal-Mart, the other $7.5 billion came indirectly through suppliers. In the same period, Wal-Mart's total net sales reached $256 billion, with roughly $209 billion coming from U.S. operations.
Tuesday, November 16, 2004
EU vs US labor and productivity data
Taken from WSJ. French and German workers are as productive, on a per hour basis, as US workers, although US workers tend to work more hours per year, which leads to greater GDP per worker per year. Two effects worth noting: (1) workers who work fewer hours should be more productive per hour, as one's effectiveness tends to degrade over a long workday (2) excluding less productive workers (i.e. having a higher unemployment rate, as Germany and France do at 9-10% vs 5% here) should lead to higher average productivity.
String theory and all that
I was asked to give a talk to the physics students here about string theory. Now, I'm not a string theorist, but am probably the closest thing on campus with the possible exception of a guy in the math department.
I emphasized that quantum gravity is perhaps the most conceptually interesting area in all of physics (perhaps all of science). I think I am not exaggerating here, since questions such as Why is there one time direction and three spatial dimensions? Can our universe be multiply-connected on short distances? or What is the endpoint of black hole evaporation? all involve deep and fundamental ideas.
But I also told them, half joking, that I didn't want to work on quantum gravity (at least not all the time) until someone builds a desktop accelerator that can collide particles at Planck energies or at least make small black holes. What I meant by this comment is that physics generally cannot advance by theoretical ideas or mathematics alone. There is no evidence that a single, unique mathematical structure describes our universe. Consequently, we will likely be confronted with more than one theoretical possibility, and only experimental tests can distinguish between them.
We are barely on the threshold of detailed tests of classical general relativity (e.g., using large interferomenters such as LIGO to detect gravity waves). There are no experiments on the drawing board which will test whether these waves are indeed quantized into individual gravitons, and the current generation of particle accelerators are 16 orders of magnitude away from testing the Planck energy. So, I think quantum gravity will not, in a strict sense, be a scientific endeavor for some years to come.
I emphasized that quantum gravity is perhaps the most conceptually interesting area in all of physics (perhaps all of science). I think I am not exaggerating here, since questions such as Why is there one time direction and three spatial dimensions? Can our universe be multiply-connected on short distances? or What is the endpoint of black hole evaporation? all involve deep and fundamental ideas.
But I also told them, half joking, that I didn't want to work on quantum gravity (at least not all the time) until someone builds a desktop accelerator that can collide particles at Planck energies or at least make small black holes. What I meant by this comment is that physics generally cannot advance by theoretical ideas or mathematics alone. There is no evidence that a single, unique mathematical structure describes our universe. Consequently, we will likely be confronted with more than one theoretical possibility, and only experimental tests can distinguish between them.
We are barely on the threshold of detailed tests of classical general relativity (e.g., using large interferomenters such as LIGO to detect gravity waves). There are no experiments on the drawing board which will test whether these waves are indeed quantized into individual gravitons, and the current generation of particle accelerators are 16 orders of magnitude away from testing the Planck energy. So, I think quantum gravity will not, in a strict sense, be a scientific endeavor for some years to come.
NYTimes on dollar
Nice overview here.
It is surprising to see how, on a trade-weighted basis, the dollar is still pretty strong by historical standards. It looks like a 20% decline would test historical lows.
It is surprising to see how, on a trade-weighted basis, the dollar is still pretty strong by historical standards. It looks like a 20% decline would test historical lows.
Monday, November 15, 2004
Bounded rationality - case closed
Yes, there really are noise traders. I took the following from the Yahoo!Finance discussion board for MSFT. Do we really want these people managing their own social security funds?
Why is MS down to 27+
by: fira9us
11/15/04 01:00 pm
Msg: 892456 of 892462
What happend to MS? It was closed to 30?
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Why is MS down to 27+
by: fira9us
11/15/04 01:00 pm
Msg: 892456 of 892462
What happend to MS? It was closed to 30?
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MSFT and Bounded Rationality
Bounded rationality (I prefer bounded cognition) refers to the cognitive or information processing limits of participants in otherwise efficient markets. Specifically, traders or consumers who lack the time or ability to figure things out before transacting. (I will refrain from calling them monkeys or noise traders :-) I discussed this in an earlier post, noting that a lot of investors were confused about the consequences of the MSFT special dividend of $3.
It seemed a lot people were under the impression that they should buy the stock in order to get the dividend, not knowing that the price would drop after it was issued. (To be eligible for the dividend you had to own your shares by end of trading last Friday, so we are now ex-dividend.) You can judge for yourself from these graphs whether it looks like there was a runup in the stock due to the anticipated dividend. As of opening today the share price dropped $3 to just over $27, so the discontinuity was there as predicted - $27 looks suspiciously like the value before the runup!
It seemed a lot people were under the impression that they should buy the stock in order to get the dividend, not knowing that the price would drop after it was issued. (To be eligible for the dividend you had to own your shares by end of trading last Friday, so we are now ex-dividend.) You can judge for yourself from these graphs whether it looks like there was a runup in the stock due to the anticipated dividend. As of opening today the share price dropped $3 to just over $27, so the discontinuity was there as predicted - $27 looks suspiciously like the value before the runup!
Sunday, November 14, 2004
Quote of the Day
The most extravagant idea that can be born in the head of a political thinker is to believe that it suffices for people to enter, weapons in hand, among a foreign people and expect to have its laws and constitution embraced. It is in the nature of things that the progress of Reason is slow and no one loves armed missionaries; the first lesson of nature and prudence is to repulse them as enemies.
One can encourage freedom, never create it by an invading force.
- Maximilien Robespierre (1791)
The part I like best (and should keep in mind) is: It is in the nature of things that the progress of Reason is slow...
One can encourage freedom, never create it by an invading force.
- Maximilien Robespierre (1791)
The part I like best (and should keep in mind) is: It is in the nature of things that the progress of Reason is slow...
Genetic basis for race
[See more recent posts on this topic here.]
The essential tension between science and political correctness on this issue is discussed in the Sunday Times.
We were told long ago that there is no scientific basis for race. Yet, it would be surprising if the distribution of individual genes were the same in all ethnic groups, with their different evolutionary histories of the last tens of thousands of years. In fact, mtDNA tests can readily identify which of a few dozen matrilineal lines any modern human belongs to. Each of these lines can in turn be traced to certain geographical regions to which early humans migrated from Africa, and correspond reasonably well to conventional racial categories.
Researchers last week described a new drug, called BiDil, that sharply reduces death from heart disease among African-Americans. ...But not everyone is cheering unreservedly. Many people, including some African-Americans, have long been uneasy with the concept of race-based medicine, in part from fear that it may legitimize less benign ideas about race.
...The emergence of BiDil, described last week in The New England Journal of Medicine, is a sharp reality test for an academic debate about race and medicine that has long occupied the pages of medical journals. Is there a biological basis for race? If there is not, as many social scientists and others argue, how can a drug like BiDil work so well in one race?
...This month, in a special issue on race published by the journal Nature Genetics, several geneticists wrote that people can generally be assigned to their continent of origin on the basis of their DNA, and that these broad geographical regions correspond to self-identified racial categories, such as African, East Asian, European and Native American. Race, in other words, does have a genetic basis, in their view.
...Some African-Americans fear that if doctors start to make diagnoses by race, then some in the public may see that as a basis for imputing behavioral traits as well. ''If you think in terms of taxonomies of race, you will make the dangerous conclusion that race will explain violence,'' says Dr. Troy Duster, a sociologist at New York University.
The essential tension between science and political correctness on this issue is discussed in the Sunday Times.
We were told long ago that there is no scientific basis for race. Yet, it would be surprising if the distribution of individual genes were the same in all ethnic groups, with their different evolutionary histories of the last tens of thousands of years. In fact, mtDNA tests can readily identify which of a few dozen matrilineal lines any modern human belongs to. Each of these lines can in turn be traced to certain geographical regions to which early humans migrated from Africa, and correspond reasonably well to conventional racial categories.
Researchers last week described a new drug, called BiDil, that sharply reduces death from heart disease among African-Americans. ...But not everyone is cheering unreservedly. Many people, including some African-Americans, have long been uneasy with the concept of race-based medicine, in part from fear that it may legitimize less benign ideas about race.
...The emergence of BiDil, described last week in The New England Journal of Medicine, is a sharp reality test for an academic debate about race and medicine that has long occupied the pages of medical journals. Is there a biological basis for race? If there is not, as many social scientists and others argue, how can a drug like BiDil work so well in one race?
...This month, in a special issue on race published by the journal Nature Genetics, several geneticists wrote that people can generally be assigned to their continent of origin on the basis of their DNA, and that these broad geographical regions correspond to self-identified racial categories, such as African, East Asian, European and Native American. Race, in other words, does have a genetic basis, in their view.
...Some African-Americans fear that if doctors start to make diagnoses by race, then some in the public may see that as a basis for imputing behavioral traits as well. ''If you think in terms of taxonomies of race, you will make the dangerous conclusion that race will explain violence,'' says Dr. Troy Duster, a sociologist at New York University.
Saturday, November 13, 2004
Sink or Schwinn?
Bicycle maker Schwinn, unable to compete with Chinese imports, went bankrupt in 1993 and now exists only as a brand label affixed to bikes imported from Asia and sold in stores like Wal-Mart.
This Economist article discusses outsourcing's effects on European vs US firms. The rigid European labor market makes redeployment of surplus workers more difficult than in the US. The following graph, based on research from McKinsey, shows that while both Germany and the US benefit from cost savings from outsourcing, inefficiency in redeploying surplus labor keeps the overall benefit to Germany from being positive, whereas it is slightly so in the US. (Positive economic impact per dollar of outsourcing exceeds one dollar here, but not in Germany.)
This Economist article discusses outsourcing's effects on European vs US firms. The rigid European labor market makes redeployment of surplus workers more difficult than in the US. The following graph, based on research from McKinsey, shows that while both Germany and the US benefit from cost savings from outsourcing, inefficiency in redeploying surplus labor keeps the overall benefit to Germany from being positive, whereas it is slightly so in the US. (Positive economic impact per dollar of outsourcing exceeds one dollar here, but not in Germany.)
Economist on Outsourcing
This week's issue surveys the situation.
As Alan Greenspan, chairman of America's Federal Reserve Bank, has pointed out, there is always likely to be anxiety about the jobs of the future, because in the long run most of them will involve producing goods and services that have not yet been invented. William Nordhaus, an economist at Yale University, has calculated that under 30% of the goods and services consumed at the end of the 20th century were variants of the goods and services produced 100 years earlier. “We travel in vehicles that were not yet invented that are powered by fuels not yet produced, communicate through devices not yet manufactured, enjoy cool air on the hottest days, are entertained by electronic wizardry that was not dreamed of and receive medical treatments that were unheard of,” writes Mr Nordhaus.
...Indeed, the definition of the sort of work that Indian outsourcing firms are good at doing remotely—repetitive and bound tightly by rules—sounds just like the sort of work that could also be delegated to machines. If offshoring is to be blamed for this “lost” work, then mechanical diggers should be blamed for usurping the work of men with shovels. In reality, shedding such lower-value tasks enables economies to redeploy the workers concerned to jobs that create more value.
My main worry is that our system doesn't do a good job of redistributing benefits from winners to losers. It seems probable that the rather sudden addition of more than a billion workers to the world labor market will, for a time, lead to a surplus of labor in certain categories or at certain skill levels. Is America's educational system really preparing surplus workers to move to "jobs that create more value"?
As Alan Greenspan, chairman of America's Federal Reserve Bank, has pointed out, there is always likely to be anxiety about the jobs of the future, because in the long run most of them will involve producing goods and services that have not yet been invented. William Nordhaus, an economist at Yale University, has calculated that under 30% of the goods and services consumed at the end of the 20th century were variants of the goods and services produced 100 years earlier. “We travel in vehicles that were not yet invented that are powered by fuels not yet produced, communicate through devices not yet manufactured, enjoy cool air on the hottest days, are entertained by electronic wizardry that was not dreamed of and receive medical treatments that were unheard of,” writes Mr Nordhaus.
...Indeed, the definition of the sort of work that Indian outsourcing firms are good at doing remotely—repetitive and bound tightly by rules—sounds just like the sort of work that could also be delegated to machines. If offshoring is to be blamed for this “lost” work, then mechanical diggers should be blamed for usurping the work of men with shovels. In reality, shedding such lower-value tasks enables economies to redeploy the workers concerned to jobs that create more value.
My main worry is that our system doesn't do a good job of redistributing benefits from winners to losers. It seems probable that the rather sudden addition of more than a billion workers to the world labor market will, for a time, lead to a surplus of labor in certain categories or at certain skill levels. Is America's educational system really preparing surplus workers to move to "jobs that create more value"?
Bubble Trouble
Here is a nice article from the Asia Times about China's boom economy and its effect on interest rates and consumption in the US.
Why you might not want to buy property in China under current bubble conditions:
The total amount of property under construction is likely to reach 1.460 billion square meters, with a market value of about 30% of the gross domestic product (GDP) by year-end. All data suggest that the market is grossly overextended.
Why you might not want to buy property in China under current bubble conditions:
The total amount of property under construction is likely to reach 1.460 billion square meters, with a market value of about 30% of the gross domestic product (GDP) by year-end. All data suggest that the market is grossly overextended.
How deep is the pool of suicide bombers?
Judging by this account by journalist Robert X. Cringley of the Iran-Iraq war, there is no effective limit on the number of potential Al Qaeda recruits.
So I took a taxi to the front, introduced myself to the local commander, who had gone, as I recall, to Iowa State, and spent a couple days waiting for the impending human wave attack. That attack was to be conducted primarily with 11-and 12-year-old boys as troops, nearly all of them unarmed. There were several thousand kids and their job was to rise out of the trench, praising Allah, run across No Man’s Land, be killed by the Iraqi machine gunners, then go directly to Paradise, do not pass GO, do not collect 200 dinars. And that’s exactly what happened in a battle lasting less than 10 minutes. None of the kids fired a shot or made it all the way to the other side. And when I asked the purpose of this exercise, I was told it was to demoralize the cowardly Iraqi soldiers.
Now put this in a current context. What effective limit is there to the number of Islamic kids willing to blow themselves to bits? There is no limit, which means that a Bush Doctrine can’t really stand in that part of the world. But of course President Bush, who may think he pulled the switch on a couple hundred Death Row inmates in Texas, has probably never seen a combat death. He doesn’t get it and he’ll proudly NEVER get it.
Welcome to the New Morality.
So I took a taxi to the front, introduced myself to the local commander, who had gone, as I recall, to Iowa State, and spent a couple days waiting for the impending human wave attack. That attack was to be conducted primarily with 11-and 12-year-old boys as troops, nearly all of them unarmed. There were several thousand kids and their job was to rise out of the trench, praising Allah, run across No Man’s Land, be killed by the Iraqi machine gunners, then go directly to Paradise, do not pass GO, do not collect 200 dinars. And that’s exactly what happened in a battle lasting less than 10 minutes. None of the kids fired a shot or made it all the way to the other side. And when I asked the purpose of this exercise, I was told it was to demoralize the cowardly Iraqi soldiers.
Now put this in a current context. What effective limit is there to the number of Islamic kids willing to blow themselves to bits? There is no limit, which means that a Bush Doctrine can’t really stand in that part of the world. But of course President Bush, who may think he pulled the switch on a couple hundred Death Row inmates in Texas, has probably never seen a combat death. He doesn’t get it and he’ll proudly NEVER get it.
Welcome to the New Morality.
Friday, November 12, 2004
Where would we be without them?
The funny thing is, I often hear from Bush supporters that deficits don't matter - after all, look how low interest rates are!
From today's WSJ article on Asian central banks and Treasury markets:
Japan's and China's purchases of Treasurys in recent years are credited with helping keep interest rates in the U.S. at historic lows. To put their role in the U.S. debt markets into perspective, Japan and China own about a quarter of Treasurys outstanding, with respective holdings of $723 billion and $172 billion.
...Foreign central banks have been big buyers of Treasurys, especially since a robust October employment report last Friday sent yields soaring. Market participants said these institutions rushed into the market as the 10-year yield approached 4.25% and put a lid on the selloff by buying government securities in large amounts, with bids Friday estimated at around $1 billion.
Some in the market speculate that the People's Bank of China led the charge that day, seeing the weakness as an opportunity to park dollars accumulated through foreign direct investment and peg maintenance into Treasurys. By some estimates within the market, the Chinese authorities have $60 billion in short-term deposits offshore that need to find an investment home.
From today's WSJ article on Asian central banks and Treasury markets:
Japan's and China's purchases of Treasurys in recent years are credited with helping keep interest rates in the U.S. at historic lows. To put their role in the U.S. debt markets into perspective, Japan and China own about a quarter of Treasurys outstanding, with respective holdings of $723 billion and $172 billion.
...Foreign central banks have been big buyers of Treasurys, especially since a robust October employment report last Friday sent yields soaring. Market participants said these institutions rushed into the market as the 10-year yield approached 4.25% and put a lid on the selloff by buying government securities in large amounts, with bids Friday estimated at around $1 billion.
Some in the market speculate that the People's Bank of China led the charge that day, seeing the weakness as an opportunity to park dollars accumulated through foreign direct investment and peg maintenance into Treasurys. By some estimates within the market, the Chinese authorities have $60 billion in short-term deposits offshore that need to find an investment home.
Thursday, November 11, 2004
Phishing the next big problem?
Phishing attacks use SPAM which appears to originate from a legitimate source such as a bank or ecommerce site. The SPAM message alerts the recipient to a "problem" with their account, and links to a URL that lets them login to fix the problem. The URL is really on a Web server controlled by the phisher, who learns the victim's password and other personal information. The result might be identity theft or even direct theft of funds from the victim's account.
I don't see any easy way to defend against this attack (esp. in red states ;-), since the email and Web site can look very authentic. I have seen some very high quality EBay and Citibank phishing attacks - certainly good enough to fool most of the population.
Companies (especially banks) have been pushing consumers to use the Web to manage their accounts, as there is a tremendous cost savings. It appears that Web transactions and phishing are about to collide head on.
John Thompson, Symantec CEO, in WSJ:
The more threatening and challenging task, however, is phishing. And I don't mean fly-casting. I mean phishing for credit-card information, Social Security numbers, mothers' maiden names. Popular Web sites or popular brands are hijacked to divert unsuspecting consumers and even small businesses off to a spot where their identities can be stolen. Phishing is growing, by the latest estimates, at 110% a month -- a month.
You couple that growth rate with a 5% response rate [to e-mail sent by phishers], and you're going to see an enormous problem. It's relatively easy to do. I mean, you can cut and paste the Citigroup logo off their Web site without a whole lot of hard work. They're hijacking very, very important and powerful brands to catch your attention.
I don't see any easy way to defend against this attack (esp. in red states ;-), since the email and Web site can look very authentic. I have seen some very high quality EBay and Citibank phishing attacks - certainly good enough to fool most of the population.
Companies (especially banks) have been pushing consumers to use the Web to manage their accounts, as there is a tremendous cost savings. It appears that Web transactions and phishing are about to collide head on.
John Thompson, Symantec CEO, in WSJ:
The more threatening and challenging task, however, is phishing. And I don't mean fly-casting. I mean phishing for credit-card information, Social Security numbers, mothers' maiden names. Popular Web sites or popular brands are hijacked to divert unsuspecting consumers and even small businesses off to a spot where their identities can be stolen. Phishing is growing, by the latest estimates, at 110% a month -- a month.
You couple that growth rate with a 5% response rate [to e-mail sent by phishers], and you're going to see an enormous problem. It's relatively easy to do. I mean, you can cut and paste the Citigroup logo off their Web site without a whole lot of hard work. They're hijacking very, very important and powerful brands to catch your attention.
What is Google worth?
When Google was nearing its IPO the share offer price implied a valuation of about $30B for the company. Since then its market cap has skyrocketed to about $45B.
At the time I used to joke around that for $1B I could easily build a competitor to Google that had 80-90% of its capabilities. Now, with Microsoft about to launch its new search service, codenamed underdog, my assertion seems to be proved, as they spent a reported $100M and 20 months to build it.
So, does this shake your faith in Google's lofty valuation? Only time will tell.
What is clear is that online advertising has become a huge industry - about $4B per year in revenues, and growing rapidly. Interestingly, there is not a single strong competitor in the search industry outside the US (except perhaps in China, and those companies are focused primarily on Chinese-language search).
Say what you want about US competitiveness, but in this case a leading new technology is completely dominated by Americans.
At the time I used to joke around that for $1B I could easily build a competitor to Google that had 80-90% of its capabilities. Now, with Microsoft about to launch its new search service, codenamed underdog, my assertion seems to be proved, as they spent a reported $100M and 20 months to build it.
So, does this shake your faith in Google's lofty valuation? Only time will tell.
What is clear is that online advertising has become a huge industry - about $4B per year in revenues, and growing rapidly. Interestingly, there is not a single strong competitor in the search industry outside the US (except perhaps in China, and those companies are focused primarily on Chinese-language search).
Say what you want about US competitiveness, but in this case a leading new technology is completely dominated by Americans.
Wednesday, November 10, 2004
How can the average investor hedge against the declining dollar?
Here are some funds which invest in foreign bonds, and which should do well if the dollar crashes:
BEGBX (Euro bonds, currency risk mostly unhedged)
PFUCX (PIMCO fund, completely unhedged)
IHHX (Templeton fund, foreign money funds, unhedged)
There is also Everbank.com, which sells foreign-currency denominated CDs.
I think these are better than international equity funds, since many foreign company shares will fall if their currency appreciates too much against the dollar.
Note that if the Bretton Woods II hypothesis is correct (see previous post), we may soon see the European Central Bank intervene to support the dollar. So, although macro trends point toward a dollar correction, it may not happen for years.
BEGBX (Euro bonds, currency risk mostly unhedged)
PFUCX (PIMCO fund, completely unhedged)
IHHX (Templeton fund, foreign money funds, unhedged)
There is also Everbank.com, which sells foreign-currency denominated CDs.
I think these are better than international equity funds, since many foreign company shares will fall if their currency appreciates too much against the dollar.
Note that if the Bretton Woods II hypothesis is correct (see previous post), we may soon see the European Central Bank intervene to support the dollar. So, although macro trends point toward a dollar correction, it may not happen for years.
Bretton Woods II
My description of why Asian central banks are supporting a strong dollar and hence financing US budget and current account deficits is apparently referred to as the Bretton Woods II hypothesis in policy/econ circles. The current arrangement is reminiscent of the old Bretton Woods regime of fixed exchange rates that lasted from 1945 to 1973.
There are some important differences, though.
Europe, not being as export-driven as Japan/Korea/Taiwan, nor under the same pressure to develop (absorb excess labor) as China, is not as incentivized as Asia to support this system. Nevertheless, the European Central Bank (ECB) may soon be forced to intervene to preserve competitiveness if the Euro continues to rise, thereby joining the cartel supporting the dollar.
One event we should all be on the lookout for is the first defection of an Asian central bank from this cartel. Any one of the smaller economies could diversify its foreign reserves into Euros (hedging against a dollar crash) without driving up the dollar appreciably. However, if each of them do so, the crash would be realized. This is obviously an unstable situation - can it last?
Who are the winners and losers under this regime? The US can continue its deficit spending while keeping interest rates low, benefiting consumers and financial institutions engaged in the carry trade, but risking the creation of asset bubbles (housing). On the other hand, US manufacturing companies will be forced to move production to Asia in order to survive.
There are some important differences, though.
Europe, not being as export-driven as Japan/Korea/Taiwan, nor under the same pressure to develop (absorb excess labor) as China, is not as incentivized as Asia to support this system. Nevertheless, the European Central Bank (ECB) may soon be forced to intervene to preserve competitiveness if the Euro continues to rise, thereby joining the cartel supporting the dollar.
One event we should all be on the lookout for is the first defection of an Asian central bank from this cartel. Any one of the smaller economies could diversify its foreign reserves into Euros (hedging against a dollar crash) without driving up the dollar appreciably. However, if each of them do so, the crash would be realized. This is obviously an unstable situation - can it last?
Who are the winners and losers under this regime? The US can continue its deficit spending while keeping interest rates low, benefiting consumers and financial institutions engaged in the carry trade, but risking the creation of asset bubbles (housing). On the other hand, US manufacturing companies will be forced to move production to Asia in order to survive.
Tuesday, November 09, 2004
FT gloomy about Bush II economic policies
Executive Summary: expect a radical agenda which helps the GOP politically but may be disastrous for the dollar and deficits.
The economics of a second term
Financial Times, Tuesday, November 9, 2004, By Adam Posen
Ideological and partisan politicians know that elections are not about mandates or checking the people's will. They are about taking the reins of power and using them to realign the balance of interests in society in their favour - either by strengthening supporters' dependence on their programmes or by weakening the programmes of the opposition. The Bush administration understands this, and its radical economic agenda will move forward aggressively as a result. The "Bush II" agenda will not be constrained by bipartisanship, fiscal discipline or even economic reality, because the ultimate motivation is not economic but ideological - to shrink government and weaken Democratic opposition. The three big economic initiatives promised by Mr Bush should therefore be seen for the political thrusts they are.
First and most importantly will be the push for partial Social Security privatisation. This policy is at least as much to win over Wall Street - the one big business sector besides Hollywood that has continued contributing to Democrats as much as Republicans - by offering the fees that go with managing hundreds of billions of dollars in private accounts. For the Bush team, the political advantages of boosting asset markets temporarily and again giving those who manage money a direct stake in Republican programmes will outweigh any long-term fiscal costs (which limit government spending anyway).
On non-partisan Congressional Budget Office estimates, the transition costs of such a programme will present a budget shortfall of 1.5-2 per cent of gross domestic product a year for 10 years. Some will claim this just moves to the balance sheet an off-balance sheet liability that would be reneged on in future. Try telling that to bond markets, which will be asked to absorb another $200bn (£108bn) a year in government paper on top of today's deficits. Of course, as financial companies make money from trading volatility and sales fees and are not themselves the ultimate holders of the accumulating US government debt, the Bush strategy hopes they will be pleased at that end of the transaction too. Turning US debt into a new class of emerging market bonds may erode America's future, and its ability to fight terror, but it also offers profit opportunities to one-time political fence-sitters.
Second, the tax cuts of the Bush first term, set to be phased out in various years, will be made permanent. This result is already on course, given the Republican majorities in Congress and the Bush team's ability to claim there would be no impact on the current budget deficits. These "permanent" tax cuts will provide no short-term stimulus but will convince high-income voters that any shift away from Republican majorities will come at their expense. The cuts are also part of the multi-pronged "starve the beast" strategy to limit any future non-defence government programmes that might aid the Democrats or their voters.
The third initiative is the pursuit of tort reform that will limit medical malpractice claims, class-action suits, asbestos litigation and so on. Of all items on the Bush economic agenda, this has the most potential for some general benefit to economic efficiency and investment. Its political motivation, however, is the crassest: trial lawyers and their lobbies are the second largest contributors to the Democratic party after organised labour. Cut jury awards, and you cut funding for Democrats.
We should not, like Claude Rains' character in Casablanca, be "shocked" that politics is going on here. If Mr Bush's planned economic initiatives also promoted the general welfare, their dual use of locking in supporters would be welcome. However, the Bush administration is putting its political staying power ahead of economic responsibility - indeed it is weakening the independence of those very institutions on which Americans rely to check economic radicalism. For example, the current Republican congressional leadership is trying to override the constitutional design whereby the Senate acts as a brake on the executive branch and on the self-interest of "majority faction". Bill Frist, senate majority leader and George Allen, the Republican senate campaign committee chair, said their unprecedented direct campaign against Tom Daschle, the defeated Senate minority leader, should warn moderate Republican and Democratic senators not to be "obstructionist", even though that is precisely what the Founding Fathers intended the Senate to do.
The coming leadership change at the Federal Reserve is also being exploited to limit the Fed's room to criticise the inflationary implications of fiscal irresponsibility. The candidates to succeed Alan Greenspan as Fed chair are limited to those (Martin Feldstein and Glenn Hubbard, for example) who not only have ample qualifications, but also have explicitly supported the Bush team's Social Security and tax agenda. Even when central bankers don the Fed chairman's mantle of impartiality, these prior public statements will give the Bush team some protection from future Fed complaints.
Markets tend to assume that the US political system will prevent lasting extremist policies so, even now, observers discount the likelihood of the Bush administration fully pursuing - let alone passing - this economic agenda. If the thin blue line of Democrats and the responsible Republican moderates in the Senate bravely fulfil their constitutional role, perhaps the damage will be limited. If not, we can foresee the US economy following the path to extended decline of the British economy in the 1960s and 1970s and of Japan in the 1990s.
But, as Japan and the UK showed, once the political-economy dynamic is in motion, it takes years for the opposition to reverse it, even as its failures become obvious. That long-term preclusion of alternative policies is ultimately the goal of the Bush economic agenda.
The economics of a second term
Financial Times, Tuesday, November 9, 2004, By Adam Posen
Ideological and partisan politicians know that elections are not about mandates or checking the people's will. They are about taking the reins of power and using them to realign the balance of interests in society in their favour - either by strengthening supporters' dependence on their programmes or by weakening the programmes of the opposition. The Bush administration understands this, and its radical economic agenda will move forward aggressively as a result. The "Bush II" agenda will not be constrained by bipartisanship, fiscal discipline or even economic reality, because the ultimate motivation is not economic but ideological - to shrink government and weaken Democratic opposition. The three big economic initiatives promised by Mr Bush should therefore be seen for the political thrusts they are.
First and most importantly will be the push for partial Social Security privatisation. This policy is at least as much to win over Wall Street - the one big business sector besides Hollywood that has continued contributing to Democrats as much as Republicans - by offering the fees that go with managing hundreds of billions of dollars in private accounts. For the Bush team, the political advantages of boosting asset markets temporarily and again giving those who manage money a direct stake in Republican programmes will outweigh any long-term fiscal costs (which limit government spending anyway).
On non-partisan Congressional Budget Office estimates, the transition costs of such a programme will present a budget shortfall of 1.5-2 per cent of gross domestic product a year for 10 years. Some will claim this just moves to the balance sheet an off-balance sheet liability that would be reneged on in future. Try telling that to bond markets, which will be asked to absorb another $200bn (£108bn) a year in government paper on top of today's deficits. Of course, as financial companies make money from trading volatility and sales fees and are not themselves the ultimate holders of the accumulating US government debt, the Bush strategy hopes they will be pleased at that end of the transaction too. Turning US debt into a new class of emerging market bonds may erode America's future, and its ability to fight terror, but it also offers profit opportunities to one-time political fence-sitters.
Second, the tax cuts of the Bush first term, set to be phased out in various years, will be made permanent. This result is already on course, given the Republican majorities in Congress and the Bush team's ability to claim there would be no impact on the current budget deficits. These "permanent" tax cuts will provide no short-term stimulus but will convince high-income voters that any shift away from Republican majorities will come at their expense. The cuts are also part of the multi-pronged "starve the beast" strategy to limit any future non-defence government programmes that might aid the Democrats or their voters.
The third initiative is the pursuit of tort reform that will limit medical malpractice claims, class-action suits, asbestos litigation and so on. Of all items on the Bush economic agenda, this has the most potential for some general benefit to economic efficiency and investment. Its political motivation, however, is the crassest: trial lawyers and their lobbies are the second largest contributors to the Democratic party after organised labour. Cut jury awards, and you cut funding for Democrats.
We should not, like Claude Rains' character in Casablanca, be "shocked" that politics is going on here. If Mr Bush's planned economic initiatives also promoted the general welfare, their dual use of locking in supporters would be welcome. However, the Bush administration is putting its political staying power ahead of economic responsibility - indeed it is weakening the independence of those very institutions on which Americans rely to check economic radicalism. For example, the current Republican congressional leadership is trying to override the constitutional design whereby the Senate acts as a brake on the executive branch and on the self-interest of "majority faction". Bill Frist, senate majority leader and George Allen, the Republican senate campaign committee chair, said their unprecedented direct campaign against Tom Daschle, the defeated Senate minority leader, should warn moderate Republican and Democratic senators not to be "obstructionist", even though that is precisely what the Founding Fathers intended the Senate to do.
The coming leadership change at the Federal Reserve is also being exploited to limit the Fed's room to criticise the inflationary implications of fiscal irresponsibility. The candidates to succeed Alan Greenspan as Fed chair are limited to those (Martin Feldstein and Glenn Hubbard, for example) who not only have ample qualifications, but also have explicitly supported the Bush team's Social Security and tax agenda. Even when central bankers don the Fed chairman's mantle of impartiality, these prior public statements will give the Bush team some protection from future Fed complaints.
Markets tend to assume that the US political system will prevent lasting extremist policies so, even now, observers discount the likelihood of the Bush administration fully pursuing - let alone passing - this economic agenda. If the thin blue line of Democrats and the responsible Republican moderates in the Senate bravely fulfil their constitutional role, perhaps the damage will be limited. If not, we can foresee the US economy following the path to extended decline of the British economy in the 1960s and 1970s and of Japan in the 1990s.
But, as Japan and the UK showed, once the political-economy dynamic is in motion, it takes years for the opposition to reverse it, even as its failures become obvious. That long-term preclusion of alternative policies is ultimately the goal of the Bush economic agenda.
Monday, November 08, 2004
Whither the Renminbi Peg?
This is something I posted on Brad DeLong's Econ blog about dollar-renminbi issues. Everyone should keep in mind that currency markets, although vast and deep, are subject to manipulation by central banks...
The PRC runs a big trade surplus with us, so they have a lot of dollars. It is in their interests to keep the RMB cheap (to keep exports competitive) and stable (to encourage further foreign direct investment).
The policy is definitely mercantilist in nature. Multinationals have concluded that China is the only scalable manufacturing base in the world: close to a huge pool of inexpensive but skilled labor and also close to fast growing markets (in China and the rest of Asia). The PRC government does not want to do anything to alter these beliefs, which led to $60B in FDI last year. Perhaps more important than the dollar investment figure, there is a huge transfer of technological and business knowledge in progress.
Once it is too late for Western companies to turn back, and domestic demand has grown enough that the economy is not wholly dependent on exports, they will definitely let the currency float.
This is essentially what happened with Japan: export driven growth on the back of a cheap currency, followed by eventual appreciation of the currency. It is hard for us to remember that the Yen used to be cheap in the 60's and 70's.
Another related point: the size of the PRC economy is very different when measured by nominal FX rates vs. PPP. It is clear that this differential will eventually go away as the country becomes fully integrated with the world economy. (Perhaps one could define "integrated" as no large discrepancy between PPP and FX rates, since the same bundle of goods should cost roughly the same in China as in the US, if trade is working properly. Recall the "no arbitrage" condition in efficient markets.) This will only happen if the RMB goes up substantially in value, just as the Yen did.
Note Added: Although the bilateral US-China trade deficit is large, China's balance of trade with the entire world is fairly even. They run big deficits with Japan, S. Korea and Taiwan. In some sense, the flow resembles: components imported to China from these countries, assembled there (modest value add), sold to consumers in US. Dollars flow back to China and to more advanced Asian economies.
The PRC runs a big trade surplus with us, so they have a lot of dollars. It is in their interests to keep the RMB cheap (to keep exports competitive) and stable (to encourage further foreign direct investment).
The policy is definitely mercantilist in nature. Multinationals have concluded that China is the only scalable manufacturing base in the world: close to a huge pool of inexpensive but skilled labor and also close to fast growing markets (in China and the rest of Asia). The PRC government does not want to do anything to alter these beliefs, which led to $60B in FDI last year. Perhaps more important than the dollar investment figure, there is a huge transfer of technological and business knowledge in progress.
Once it is too late for Western companies to turn back, and domestic demand has grown enough that the economy is not wholly dependent on exports, they will definitely let the currency float.
This is essentially what happened with Japan: export driven growth on the back of a cheap currency, followed by eventual appreciation of the currency. It is hard for us to remember that the Yen used to be cheap in the 60's and 70's.
Another related point: the size of the PRC economy is very different when measured by nominal FX rates vs. PPP. It is clear that this differential will eventually go away as the country becomes fully integrated with the world economy. (Perhaps one could define "integrated" as no large discrepancy between PPP and FX rates, since the same bundle of goods should cost roughly the same in China as in the US, if trade is working properly. Recall the "no arbitrage" condition in efficient markets.) This will only happen if the RMB goes up substantially in value, just as the Yen did.
Note Added: Although the bilateral US-China trade deficit is large, China's balance of trade with the entire world is fairly even. They run big deficits with Japan, S. Korea and Taiwan. In some sense, the flow resembles: components imported to China from these countries, assembled there (modest value add), sold to consumers in US. Dollars flow back to China and to more advanced Asian economies.
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