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SUNDAY 10 JULY 2016


THE GLOBAL MAHJONG WINNER'S CURSE


Like mahjong: The current world situation is like the Chinese game of mahjong
which has four players with a limited number of chips. If one player is the
persistent winner, he or she ends up with all the chips and the game ends.


Winners and losers in the global economy of 2025
 Winners and losers in the global eco

There is grave concern that the world economy is slipping into what Harvard
professor and former US Treasury Secretary Larry Summers calls the global
secular deflation. In simple terms, growth has slowed without inflation, despite
exceptionally stimulative monetary policy. Larry’s view is that the advanced
countries can use fiscal policy to stimulate growth, using massive investments
in infrastructure. If needs be, this can be financed by central banks.

Central bank financing fiscal deficits is technically called “helicopter money”,
named by the late monetarist economist Milton Friedman as the central bank
pushing money out of the helicopter. Strict monetarism thinks that this would
cause inflation.

The simple reason why the world is moving into secular deflation is that the
largest economies are all slowing for a variety of reasons. Unconventional
monetary policy applied since the 2007 crisis has brought central bank interest
rates to zero or negative terms in economies accounting for 60% of world GDP.

Most economists blame current slow growth to “lack of aggregate demand” or
“excess of aggregate production”. The rich countries are mostly aging and
already heavily burdened with debt, so they cannot consume more. After the 2007
global financial crisis, the emerging market economies have slowed down, as
demand for their exports have slowed. We are in a vicious circle where global
trade growth is now slower than GDP growth, because the US economy is no longer
the consumption engine of last resort. China, which has been a huge consumer of
commodities, has slowed. Japanese growth has been flat due to an aging
population. European growth has not recovered, partly because the leading
economy, Germany, calls for austerity by its southern partners.

The Brexit shock threatens to weaken global confidence and send growth down
another notch.

Former Bank of England Governor Lord Mervyn King famously called the global
monetary order a game of sodoku, in which national current accounts in the
balance of payments add up to a zero sum game. This is because in the global
trade game, one country’s current account deficit is another country’s surplus.
In the past, if the US runs larger and larger current account deficits, world
growth is stimulated because everyone wants to hold dollars and has been willing
to supply the US with all manners of consumer goods. This has been called an
“exorbitant privilege” for the dollar.

The present global monetary order or non-order is a result of the 1971 US dollar
de-link from gold, which gave rise to a phase of floating exchange rates and
rising capital flows, which some people call Bretton Woods II. The old order,
set at the Bretton Wood Conference of 1944, centered around a system of global
fixed exchange rates, based on the US dollar link with gold price at US$35 to
one ounce of gold.

But flexible exchange rates has resulted in a system where everyone seems to be
devaluing their way out of trouble. Has the global secular deflation something
to do with Bretton Woods II?

My answer must be yes. The reason lies in what I call, instead of sodoku, the
mahjong winner’s curse. The Chinese game of mahjong has four players with a
limited number of chips. If one player is the persistent winner, he or she ends
up with all the chips and the game stops. Since the global game of trade cannot
stop, the winner has both an exorbitant privilege (of being funded by the
others) and an exorbitant curse (of bearing the loss if the others won’t or
refuse to pay). To keep the game going, the winner has to give or lend the chips
back to the other players, who play with the hope of winning the next round.

Indeed, if the winner is generous, the game can be made bigger, because the
winner can issue more chips (defined as a reserve currency), which the others
are more than willing to borrow and play.

The current world situation is that the Winners are the four reserve currency
countries, the dollar, euro, yen and sterling, all of which have interest rates
near zero or even negative. Until recently, the Winners blame China and the oil
producing countries as having too high current account surpluses. But recently,
after the huge European cutback in expenditure, Europe as a whole is the world’s
largest current account surplus group of nearly 5% of GDP.

Herein lies the winner’s curse. The emerging markets should be able to stimulate
global growth, but are unwilling to run larger current account deficits because
they cannot get financing. The richer economies can stimulate global growth, but
they are unwilling to do so, because they either feel that they already have too
much debt or because they worry that stimulus would lead to inflation.

However, reserve currency countries have an advantage. As long as they are
willing to run current account deficits, there will be little inflation because
the world economy has huge excess capacity and surplus savings. If emerging
markets run higher current account deficits, they will have to depreciate, which
is exactly what Brazil, South Africa and others have done.

The winner’s curse is that if Europe is now unwilling to reflate and spend, the
world will continue to slow. Indeed, in a world of greater geo-political risks,
money is fleeing to the US dollar and the yen, causing both to appreciate.

What these capital flows into the reserve currencies when their interest rate is
zero and they are unable to reflate imply is that the dollar and yen play the
deflationary role of gold in the 1930s. As more and more mahjong players hold
gold and don’t spend, the world global trade and growth game slows further. The
mahjong winner’s curse requires the winners to stimulate and spend, bearing
higher credit risks. That’s the privilege and responsibility of winners in the
global game. If not, look out for more global secular deflation.

By Tan Sri Andrew Sheng who writes on global issues from an Asian perspective.

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Posted by righways at 12:36
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Labels: American Ponzi Schemes, Andrew Sheng, Banking, Charles Ponzi, Currency,
Economy and Business, Finance, Money, Politics, Tan Sri Andrew Sheng, The
alchemy of money, The global mahjong winner's curse, US


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MORAL VACUUM AT THE HEART OF MODERNITY, NOW EMBODIED IN US LAWS!

  ` ` MAN and nature are running out of time. That’s the core message of the UN
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MORAL VACUUM AT THE HEART OF MODERNITY, NOW EMBODIED IN US LAWS!

` In short, historically it was the Church that gave the moral blessing for
colonisation, slavery and genocide during the Age of Globalisation. The tragedy
is that the Doctrine of Discovery is now embodied in US laws.




WELCOME! 歡迎和風行少年連結 謝謝


Experience suggests that Washington often says one thing and does another, using
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are actually a framework for protecting the interests of the US and its major
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