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Neoliberalism: Oversold? (Yes)

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Has economic freedom been oversold? That was the question asked (and ultimately answered) in a new paper by the research arm of the International Monetary Fund (IMF). The agency is the international “central bank to central banks” which swoops in and provides cash to bail out entire nations – for a price, of course. That price has always been a little bit of austerity for the government and de-regulation all around.

The guiding philosophy goes by a handle which may seem off to many in the United States – Neoliberalism. It was a response to the failure of classical Liberalism, or reduction of state power in favor of free markets, which failed in the last Depression. This depression seems to have been about as kind to the general concept for many of the same reasons.

As always it’s worth talking about in the sense that we are again confronted with the possibility that “everything the experts know is wrong” – a feeling certainly stirred up elections throughout the developed world lately.

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Rising Again?

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The best bet for economic growth in the US comes from simply looking around the world. Japan is in a recession, Europe appears hopeless, and China is struggling. Where else can you put your money?

The answer appears to be the developing world, or emerging markets. Granted, whenever someone talks about “emerging markets” they usually wind up focusing on China – which definitely carries a lot of risk in terms of both currency value (fixed by the still communist government) and slowing growth. But throughout the rest of the planet there is opportunity. Lots of it, in fact.

While the US still looks great as a “safe haven” there is plenty of reason for cash to start flowing back to the developing world. But that investment is almost certainly going to be led by US investors given the strength of the US dollar.

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Fear Doesn’t Glitter

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“All money is a matter of belief.”
– Adam Smith

Gold is taking a solid beating these days. It’s been slipping for a while, but when China revealed that it’s reserves were less than believed it really fell – quickly slipping below $1,100 per ounce when one mysterious trader dumped everything. It’s now more than a third off its 2010 peak and nearly everyone believes that it’s doomed to slip below $1,000 per ounce by the end of the year.

What happened? Isn’t gold the ultimate money in an unstable world? The short answer is no, and this has as much to do with the rise of the US Dollar as anything. But in the end gold is not as much a form of money as it is a barometer of fear – a commodity that appears to be in much shorter supply today than it was just a few years ago.

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Bear or Bull?

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We’ve spent a lot of time talking about workers – where they have been beaten up for the last 40 years and how the last 15 years have if anything been worse. We outlined a way out of the problem as well by taking on the overhead per employee in an effort to make labor cheaper.

But what about capital? While this has been a good time to be rich there hasn’t been a good place to invest money, leaving much of it parked on the sidelines. Part of the prediction for a big change after 2017 is a big turnaround in investment, which has been low lately. Where will that money come from?

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Chinese Meltdown, Latin America Next?

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The long anticipated meltdown in Chinese stocks has accelerated this week, although it took a break today. Whether or not it has implications for the broader economy in China and around the world is unclear, given how little China relies on its stock market for financing and growth.

It’s all about the “carry trade”, or ability to borrow money in a foreign currency (usually US Dollars) at low interest rates and invest it at home in the hope that the local currency (Renminbi, or “people’s currency”) will become more valuable relative to the foreign currency later. It’s a two-fer if you can invest it in something that appears to be gaining in value, such as local stocks, and Chinese investors went for it bigtime.

Yes, it was all another bubble waiting to pop, which it appears to be doing now. But can this hurt us? Speculation has centered on trade with Latin America, which has its own uneven growth and a growing reliance on China. But this is silly for a lot of reasons. It’s worth looking at Latin America as a unit and seeing what effects we can really expect.

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