What Planet is Niall Ferguson Living On?

The golden boy of establishment economics is so full of it, I can hardly believe what he just wrote on his blog:

“In reality, today’s currency war is between “Chimerica”—as I’ve called the united economies of China and America—and the rest of the world.”

WTF? Ferguson thinks that the conflict between the USA and China is just a puppet show to distract attention from our “united” economies sticking it to India and Brazil.

Did Ferguson miss Obama’s love-fest in India on his way to the G-20 meeting in South Korea? Does he think that the Chinese are happy about the prospect of India switching from Russian military gear to US gear starting with the cargo plane deal that Obama announced?

Did Ferguson not notice that Bernanke fired the first round from his QE2 bazooka on November 12th, the very same day that the G-20 meeting ended with the mercantilists rejecting US trade proposals?

Did Ferguson not notice Bernanke’s historic speech singling-out China as a detriment to the global recovery? Say what you will about Bernanke, but he is the second-most powerful man in the world. He can make or break entire nations. Only a fool would want to be in his cross-hairs.

Even neocon bossman Charles Krauthammer approved of Obama’s India doings and sez that we have made a strategic geo-political shift from China to India.

Before the G-20 meeting, the USS George Washington aircraft carrier stayed out of the Yellow Sea at China’s insistence. After the G-20 meeting, it sailed back into the Yellow Sea.


Niall Ferguson “job” at Harvard and the London School of Economics is to paint a big, moronic happy-face onto the beginnings of an historic conflict between the USA and China. And that’s just propaganda on behalf of the multi-nationals striving to keep the sweatshop profits flowing, and the factories flowing from the USA to China.

Ferguson also writes:

“If the U.S. prints money while China effectively still pegs its currency to the dollar, both parties benefit.”

Does he really think that the food inflation resulting from the peg is a benefit to the Chinese people?

And then this BS:

“Only America’s “exorbitant privilege” of being able to print the world’s premier reserve currency gives it breathing space. Yet this very privilege is under mounting attack from the Chinese government.”

The Chinese, huh? Criticizing our currency? Don’t make me laugh. Does Ferguson know that the IMF won’t even allow the Chinese yuan into its SDR?:

“The International Monetary Fund said China’s yuan doesn’t currently meet the “freely usable” criteria required for inclusion in its Special Drawing Rights valuation basket made up of the dollar, euro, yen and the pound.”

Ferguson then goes on waxing poetic about China’s grand strategy, concluding that China will overtake the USA just like the Japanese were supposed to do back in the 1980s.

But China’s desperate clinging to its currency peg puts the lie to the whole “grand strategy.” Why would China risk, not only food inflation and a currency war, but the USA “playing the India card” just like Nixon played the China card against the Soviets during the Cold War?

I’ll tell you why. China’s crude sweatshops can’t compete on a level playing field. If the value of the yuan were to be set by market forces rather than dictatorial decree, many of China’s “fabulous” sweatshops would shut down just like Wen Jiabao said:

“Do not work to pressure us on the renminbi rate…. Many of our exporting companies would have to close down, migrant workers would have to return to their villages. If China saw social and economic turbulence, then it would be a disaster for the world.”

Ferguson thinks Wen’s comment was just for show. Ferguson is wrong. The only thing wrong about the quote is that it would be a disaster for the world. The actual disaster is the current “10 and 10” system where China grows at 10% and the USA suffers 10% unemployment.

That will not last no matter how fervently Ferguson kowtows to Beijing.

Note: The sale of giant cargo airplanes to India is extra-significant because they are critical for projecting military power. And the Chinese military has been having trouble expanding their fleet. Here is what the Defense Department said in its 2010 Annual Report to Congress (page 34):

“The PLAAF has, however, encountered difficulty expanding its fleet of long-range heavy transport aircraft. Neither Russian nor domestic PRC manufacturers have proven able to fill the PLAAF’s requirement for long-haul transports in support of peacekeeping, disaster relief, and other requirements.”

The European Union won’t sell military gear to China, and neither will we, so it’s not easy for China to acquire such aircraft. And that is just another facet of Ferguson’s delusion that we are “united” with China.

I Lecture Jeremy Grantham

Last week, fund manager Jeremy Grantham’s investor-letter titled “Night of the Living Fed” made a splash in the financial media. However, I have assigned a grade of “F” to his paper.

Grantham’s argument may be summarized as follows: “The Fed blows up destructive asset bubbles because they are stupid.”

But is it that simple? One of the Fed’s mandates is to strive for “maximum employment”. But was it the Fed that “fast tracked” NAFTA through Congress? Did the Fed award “most favored nation” status to China? Did the Fed import millions of immigrants? Did the Fed export 42,000 factories and millions of manufacturing jobs?

No, it did not. But the Fed has a mandate from Congress to deal with the fallout.

In 16 pages of extensive Fed criticism, Grantham never even mentioned The Conundrum. By this omission, he is asserting that mass-scale Chinese bond purchases had nothing to do with causing the housing bubble. And so, his neglect of this “800-pound gorilla in the room” consigns his work to the “gratuitous Fed bashing” category.

Grantham barely even mentions the trade and immigration policies that have forced 41 million Americans onto food stamps.

Note to Grantham: Your Fed-bashing is not helping.

Grantham also unbelievably blames the snowballing trade war with China on the Fed. From page 11:

“And all of this stems from the Fed and the failed idea that it can or should interfere with employment levels by interfering with asset prices.”

Preposterous! Maybe Grantham believes that we should just accept these “employment levels”? Just lay back and take it? Grantham also doesn’t even mention our gigantic trade deficit with China. Does he really think that our trade relationship with China is sustainable?

The Fed had nothing to do with the policies that have delivered us into this state of affairs. The Fed also does not have the power to reverse said policies. And the Fed’s tools are obviously not very effective in dealing with the fallout. Of course, when the nation follows simultaneous policies of de-industrialization and mass immigration, there is no solution.

The Fed is not the cause of our problems, and people like Grantham who make it the whipping boy, contribute to the decline of this nation by deflecting attention from the real causes.

I Lecture Paul Tudor Jones

Two weeks ago I unleashed a “China Trade War” meme swarm. And I’m happy to see those memes propagated through this letter by legendary investor Paul Tudor Jones.

For example, on October 16th, I wrote:

“China began this trade war when they devalued their currency and pegged it to the dollar in 1994. They have been winning the war handily ever since.”

A few days later, Mr. Jones wrote:

“On January 1, 1994, China devalued its currency by 50% in a single day, and since then has experienced a manufacturing boom. …the US has already been in a trade war for nearly two decades; and it is the only time in this nation’s history it surrendered without ever firing a shot.”

There are many more such instances of meme propagation, but I won’t belabor the point. And Mr. Jones did indeed strengthen the swarm by adding not only gravitas, but by adding value with additional facts. For example, his point about Brazil is very important. The Chinese act all hysterical when we ask them to relinquish the peg, but the Brazilians let the real appreciate by 34% against the dollar, and there was no calamity.

Now, there is very little to quibble with in Jone’s piece. His grade for the paper is an “A”. It would have been an “A+”, but he only touched very briefly, and lightly upon the role of multinational corporations.

In the quote above, Jones says that we: “surrendered without ever firing a shot.” But both the George H.W. Bush and Bill Clinton administrations cited China as a currency manipulator right at the beginning of this trade war. So, we were trying to fight, but there is no doubt that the multinationals brought pressure to bear and are, in fact, responsible for the peg being maintained all these years. After all, there are stupendous profits from mass-scale sweat-shop operations at stake.

The next assignment for Mr. Jones is to extend his argument by encompassing the “international labor arbitrage” being practice by multinational corporations.

And one last point about Mr. Jones’ final two sentences:

“Japan has an unemployment rate that is half that of the United States and it still runs a trade surplus. Nonetheless, Japan intervened to protect its export industry, and the United States, incomprehensibly, responded with not even a whimper, let alone a bang.”

We do indeed need to address all of our trade deficits, but if you recall, the Japanese were reacting to China purchasing a large number of JGB’s under the guise of diversifying her reserves. In reality, it was an attack to drive up the yen and take share from Japanese exporters.

We are not the only target of China’s mercantilist aggression.

And then there is the geopolitics of China trying to steal islands from Japan and her other neighbors in the Pacific Ocean. There was the fishing-boat dust-up with Japan. Then the rare-earth mineral embargo, which can be considered a military threat to us since so many of our high-tech weapons rely upon them. And when you consider that Japan has been a US ally for 65 years, and the Chinese communists have never been a political ally (except for a brief period during World War 2), it makes sense to cut the Japanese some slack.

If we need to reduce our trade deficit with Japan after dealing with the Chinese, then it would be appropriate to go about it in a diplomatic manner as we did with the Plaza Accord. The Chinese have said that they will resist a similar agreement, so it is they who are making this ugly.

Note: If you can get a copy of the 1987 PBS film: “TRADER: The Documentary”, you can see Jones predicting the 1987 crash. He and his partner used an analog between the 1920s bull market and the 1980s bull to make the prediction. You can also see him day-trading futures and currencies, shouting into the phone at floor-traders, putting on his lucky sneakers, using Elliot Wave Theory, etc. If you are a trader, you will love it.

Note: Jones brought up the subject of “weaponizing financial imbalances”. I have been meaning to post something about that and will try to get it out soon.