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  • Author: John H. Makin
  • Publication Date: 07-2009
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: The recent steps by the Federal Reserve to preempt deflation have—ironically and unexpectedly— prompted a surge in inflation fears both inside the United States and abroad, especially in China. Specifically, the Fed's measures to go beyond the stimulus inherent in a zero percent federal funds rate by purchasing Treasury and mortgage securities has conjured visions—especially in the eyes of major buyers of Treasury securities, China foremost— of massive money printing to underwrite trillions of dollars of additional government borrowing at low interest rates. As markets have shown, if that were the Fed's intention—which it decidedly is not—the effort would fail because excessive money printing—creating a money supply larger than the quantity of money demanded— would push up interest rates as inflation expectations rose.
  • Topic: Economics, International Political Economy, International Trade and Finance, Monetary Policy
  • Political Geography: United States, China
  • Author: John H. Makin
  • Publication Date: 09-2009
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: More than two years have passed since the U.S. housing bubble burst. That event ushered in a financial crisis that was not only intense but also stunning. So stunning in fact, that in August of last year, just a month before the collapse of Lehman Brothers, the global economy was close to a crisis worthy of comparison with the Great Depression, yet neither the markets nor the Federal Reserve had much of an inkling of what was to come. The Standard and Poor's (S) 500 Index had come down to about 1,300 from its October 2007 high of 1,576. Positive growth had just been reported for the U.S. economy during the second quarter of 2008 at an annual rate of 2.8 percent (later revised down to 1.5 percent). Almost one percentage point of that growth came from U.S. consumption, and government spending also contributed. The wave of relief after the Bear Stearns scare in March 2008 had provided a nice boost to the economy and to markets. That boost was further enhanced by the substantial contribution to growth from net exports (2.9 percentage points) thanks to what was, then, continuing strength in the global economy, especially in China, which had reported blistering 10.1 percent year-over-year growth in the second quarter of 2008. These and other positive components more than offset a drag from inventories and residential investment. In short, the real economy had not shown much evidence of damage emanating from the chaos that was churning in the financial sector.
  • Topic: Economics, International Political Economy, International Trade and Finance, Markets, Monetary Policy, Financial Crisis
  • Political Geography: United States, China
  • Author: Claude Barfield
  • Publication Date: 05-2008
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: While the waning months of an administration is normally not a time for new foreign policy initiatives, President Bush should break precedent and begin formal negotiations with Taiwan for an FTA. Such a move would send a powerful signal to our allies in East Asia that America—despite great sympathy for the humanitarian efforts of the authoritarian Chinese government after the earthquake and thus far foregoing intervention against the military thugs in Burma—still stands by its determination to foster and support democratic regimes in the region.
  • Topic: Diplomacy, Treaties and Agreements
  • Political Geography: United States, China, Taiwan, Asia, Burma
  • Author: John H. Makin
  • Publication Date: 01-2007
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: Top economic policymakers from China and the United States met in Beijing in mid-December 2006 for the first round of what has been called the U.S.-China Strategic Economic Dialogue (SED). There is a lot more at stake than the level of China's currency when the world's premier economic sprinter—China—meets with the world's premier economic long-distance runner—America. The fundamental issue at hand is the creation and preservation of wealth of two nations, each of which has much to teach the other. The right outcome from the dialogue would provide a substantial boost to the global economy in coming years, while the wrong outcome would threaten the continuation of global prosperity.
  • Topic: International Relations, Economics
  • Political Geography: United States, China, Beijing, Asia
  • Author: Thomas Donnelly, Colin Monaghan
  • Publication Date: 03-2007
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: The White House has recently taken important steps to ensure that the tenets of the Bush Doctrine endure beyond the end of President George W. Bush's administration, including a new strategy in Iraq and an increase in the size of U.S. land forces. But as time grows short, the president needs to attend closely to three matters. The first of these—a surge in U.S. efforts in Afghanistan—was discussed in the February 2007 edition of National Security Outlook, is a need as obvious and pressing as Iraq and an important factor in the urgency of rebuilding land forces, especially the Army. The second and third factors are less frequently discussed but essential for the long-term viability of the Bush Doctrine and the continuation of the Pax Americana: articulating a strategy for the “Long War” in the greater Middle East and devising a genuinely global response to the rise of China. This issue of National Security Outlook is devoted to the second factor, the strategy for winning the Long War in the Middle East.
  • Topic: Government, National Security, War
  • Political Geography: Afghanistan, United States, China, Iraq, America, Middle East, Asia
  • Author: Thomas Donnelly
  • Publication Date: 02-2007
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: With the recent announcements of a new strategy for Iraq and a commitment to begin increasing the size of U.S. land forces, the White House has taken two important steps to ensure that the tenets of the Bush Doctrine endure beyond the end of President George W. Bush's administration. Since 9/11 and indeed since the beginning of this administration, strategy has been made by an odd combination of ad hoc improvisation and expansive rhetoric. The day-to-day business of fitting means to ends and filling in the policy blanks has either been delegated to subordinates, left to the bureaucracy, or put in the “too hard” box. As time grows short, Bush needs to attend closely to three further matters. The first is as obvious and pressing as Iraq and an important factor in the need to rebuild land forces, especially the Army: a surge in U.S. efforts in Afghanistan. The second and third factors are less frequently discussed but essential for the long-term viability of the Bush Doctrine and the continuity of the Pax Americana: articulate a strategy for the “long war” in the greater Middle East and devise a genuinely global response to the rise of China. This issue of National Security Outlook begins a series devoted to these three measures of the enduring meaning of the Bush Doctrine.
  • Topic: International Relations, Government, National Security
  • Political Geography: Afghanistan, United States, China, Iraq, America, Asia
  • Author: Robert F. Noreiga
  • Publication Date: 12-2006
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: While the world's attention is focused on a struggling Iraq and a rising China, a battle for the heart and soul of the Americas is being waged closer to home. A simplistic account might describe this confrontation as a tug of war between U.S. president George W. Bush's vision and that of his self-appointed nemesis, Venezuelan president Hugo Chávez. Equally misleading are characterizations that describe the showdown as one between left and right, rich and poor, north and south. But this is not a battle between two powerful leaders or between ideologies of the left and right. The contest being waged in the Western Hemisphere is about democracy itself: can it deliver the goods for impatient publics? On one side are leaders from the left and right who see democratic institutions and the rule of law as indispensable to prosperity and liberty. On the other are those who treat democracy as an inconvenience and see free markets as a threat.
  • Topic: Democratization, Development, Politics
  • Political Geography: China, Asia
  • Author: John H. Makin
  • Publication Date: 05-2006
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: In their April 21 press release following their spring meeting in Washington, D.C., the G7 finance ministers and central bank governors added an important sentence to their usual bland statement that exchange rates should reflect economic fundamentals: Greater exchange rate flexibility is desirable in emerging economies with large current account surpluses, especially China, for necessary adjustments to occur. In their April 21 press release following their spring meeting in Washington, D.C., the G7 finance ministers and central bank governors added an important sentence to their usual bland statement that exchange rates should reflect economic fundamentals: Greater exchange rate flexibility is desirable in emerging economies with large current account surpluses, especially China, for necessary adjustments to occur. The G7, significantly, also called for an increased role for the International Monetary Fund (IMF) to help countries, including those in the G7 but also China and others in emerging Asia, meet the macroeconomic and financial policy challenge of globalization. Specifically, the G7 supported the strengthening of IMF surveillance, including through increased emphasis on the consistency of exchange rate policies with domestic policies and a market-based international monetary system and on the spillover effects of domestic policies on other countries. The G7s endorsement of greater exchange-rate flexibility and of an enhanced IMF role in implementing it is important. The IMF, having been founded after World War II to maintain stable exchange rates among major economies, has become an advocate on behalf of the major economies of global exchange-rate flexibility. The lesson regarding the need for G7 currency flexibility was learned after Americas August 1971 abandonment of fixed exchange rates, which was followed by a decade of adjustments to higher oil prices that would have wreaked havoc under fixed exchange rates. The lesson for needed currency flexibility in emerging markets was learned after the disastrous attempt, fostered in part by the IMF, to impose fixed exchange rates during the Asian and Russian crises of 1997 and 1998, which prolonged and exacerbated the market gyrations caused by the crises. Sadly, China response to the G7-IMF call for greater currency flexibility has been both negative and misguided. China's foolishly insouciant attitude, captured in a comment by Zhou Xiao-chuan, governor of the Peoples Bank of China, carries with it serious risks both for China and for the world economy. Zhous remark was quoted on April 24 in the Wall Street Journal: [T]he speed of moving forward (on yuan appreciation) is OK. Its good for China and welcomed by many other countries. China's currency has appreciated only 1.2 percent since its initial 2.1 percent revaluation last July 21. That is less than OK. The total 3.3 percent revaluation against the dollar really represents no adjustment at all in view of the 1 to 2 percent inflation differential (lower in China) that has persisted between the United States and China over the past two years. If China had allowed prices to rise instead of mandating caps on prices of important commodities like gasoline, there would be less pressure for the yuan to rise in value. Both the intervention to cap the yuans appreciation and the capping of domestic prices are building up potentially disruptive inflation pressure inside China, as we shall see below. The most dangerous aspect of China's increased efforts to prevent yuan appreciation, as measured by accelerating reserve accumulation over the past year, is the rising pool of liquidity inside China that has resulted. The level of excess reserves in Chinese banks is now larger, relative to GDP, than the level of excess reserves built up in Japan from 2001 to 2005 during the years of a prolonged, desperate struggle against deflation. China's currency undervaluation, coupled with the massive liquidity buildup in its banking system, has resulted in excessive investment in China's state enterprises that have close traditional ties with the liquidity-sodden banks. The usual Chinese response to excess reserves has been to boost reserve requirements for its banks. But to absorb the huge pool of excess reserves now in place, reserve requirements would have to be boosted by 5 percentage points to 12.5 per-cent, going far beyond previous moves of 0.5 to 1 percentage point, and far beyond what China's shaky, insolvent banks could endure. When the Peoples Bank of China boosted its one-year benchmark lending rate on April 26 by 27 basis points (to 5.85 percent), it took a tiny step that will do little to tighten China's monetary stance.
  • Topic: Development, Economics, International Trade and Finance
  • Political Geography: United States, China, Washington
  • Author: John H. Makin
  • Publication Date: 02-2005
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: The average forecast for 2005 U.S. growth is 3.5 percent, with some prognosticators hoping for 4 percent. This forecast is predicated upon the assumption that the economy is on a sustainable expansion path, where consumption will be supported by steady growth of employment and household incomes. The 3.5 percent growth forecast for 2005 is identical to the mean growth rate of the U.S. economy since 1947. However, there is good reason to believe that the consensus forecast is too high. This possibility has important consequences because U.S. growth must be sustained at least at average levels to avoid a sharp drop in global growth. There are no signs of higher growth in Europe and Asia. Growth in Japan is looking weaker, while Chinese growth is moderating.
  • Topic: Economics, International Trade and Finance, Political Economy
  • Political Geography: United States, Japan, China, Europe, Asia
  • Author: Robert W. Hahn
  • Publication Date: 10-2005
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: With oil and gas prices at record levels, Persian Gulf producers threatened by terrorists, and exploding demand from China likely to strain supplies for years to come, surely it is time for Washington to get serious about energy conservation. Well, yes . . . and no. While most economists (including me) are deeply skeptical about the value of government mandates for energy efficiency, in principle there is a case to be made for using taxes to “internalize” the costs of consumption that are not otherwise reflected in prices. But those costs are lower than you might expect—lower, perhaps, than the taxes currently charged at the pump. Moreover, while oil-security worries are now driving the calls for conservation, a careful look suggests that the neglected costs are actually related to traffic congestion and the threat of global warming. Taxing oil consumption (as opposed to taxing road use or carbon emissions) would hardly get to the roots of these problems.
  • Topic: International Relations, Economics, Energy Policy, Terrorism
  • Political Geography: China, Washington