Download Financial Freedom

Global Market Volatility: The
Role of China, Central Banks
and Monetary Policies
The Real Risks and the Implications
for the Global Economy
J. A. Dorn
ICTF Global Credit Professionals
Symposium, Chicago, April 18, 2016
“Yellen warns global turbulence could hit growth”
Financial Times, February 10, 2016
Sam Fleming in Washington
China
•
•
•
•
•
•
•
•
China Growth Slowdown
Financial Repression
Capital Outflows
State-Dominated Financial Sector
No Free Market for Ideas
Politicization of Finance
Power vs. Free Markets
Supply-Side Economics: Rise and Fall
Financial Turmoil
•
•
•
•
•
•
•
•
Since 2008
Unconventional Monetary Policy
ZIRP and QE
Increased Risk Taking, Leverage
A Tiger by the Tail
Regime Uncertainty: The Regulatory State
Backlash against Free Markets
The Debt Trap: Fiscal Dominance
Financial Turmoil in EMEs
No Monetary Rule
• “Monetary policy is by no means on a preset
course.”
Janet Yellen
Semiannual Monetary Policy Report to Congress
February 10, 2016
Unconventional Monetary Policy
2008–
•
•
•
•
•
•
•
•
Zero Interest Rate Policy (ZIRP)
Quantitative Easing (QE)
Negative Interest Policy (NIRP), ECB
Search for Yield, Increased Risk Taking
Penalizing Savers, Private Investment
Pseudo Wealth Effect, Slow Growth
Increased Leverage
Credit Misallocation
ZIRP: Zero Interest Rate Policy
QE 1, 2, 3
U.S. Nonfinancial Debt/GDP
Global Debt
Source: McKinsey Global Institute, 2015.
IOR (06.10.08)
Plugged up Monetary
Transition Mechanism
𝛼 = 𝑀1/𝑀𝐵
Fed Failure
“Whatever it takes ….”
“Whatever it takes ….”
“The ECB is ready to do whatever it takes to
preserve the euro.”
—Mario Draghi (2012)
“Mario Draghi Throws the Kitchen Sink at
Europe’s Economic Distress. Again.”
New York Times
Neil Irwin, March 10, 2016
“Whatever it takes …”
Expiration Date on
Zimbabwe Dollar (2008)
The Limits of Monetary Policy
•
•
•
•
What Monetary Policy Can and Can’t Do
Overburdening Monetary Policy
Good vs. Bad Deflation
Simple Rules for a Complex World
(Richard Epstein)
• Hubris
• Importance of Sound Monetary Regime
INSTITUTIONS MATTER
The Wealth of Nations
“The first and chief design of every system of
government is to . . . prevent the members of
society from encroaching on one another’s
property, or seizing what is not their own.”
—Adam Smith (1762, Lectures on
Jurisprudence)
Adam
Smith in
China,
SWUFE
A Simple System of Natural Liberty
• “[If] all systems either of preference or of
restraint” were “completely taken away,” a
“simple system of natural liberty” would
evolve “of its own accord.”
• Each individual would then be “left perfectly
free to pursue his own interest in his own way
[provided] he does not violate the laws of
justice.”
—Adam Smith (1776)
Ideas Matter
“Society’s course will be changed only by a
change in ideas.”
—F. A. Hayek
“Ideas and leadership are the two most
important forces in all institutional
changes.”
—Weiying Zhang
Principle of Spontaneous Order
• “The most important central principle in
economics” (J. M. Buchanan, 1979)
Hayek on Spontaneous Order
“Under the enforcement of universal rules of
just conduct, protecting a recognizable private
domain of individuals, a spontaneous order of
human activities of much greater complexity will
form itself than could ever be produced by
deliberate arrangement, and in consequence the
coercive activities of government should be
limited to the enforcement of such rules.”
—F. A. Hayek (1967)
F. A. Hayek
Freedom and Development
“I regard the extension of the range of
choice . . . as the principal objective
and criterion of economic
development.”
—Peter Bauer
Peter T. Bauer
Hong Kong’s Development Model
• “Big Market, Small Government”
• Trade liberalization widened the range of
choices open to people.
• Capital freedom increased investment
possibilities.
• Entrepreneurship thrived in a climate of
limited government, rule of law, and freedom.
Hong Kong 1938
Hong Kong Today
The Miracle of Freedom
Financial Freedom
100
Hong Kong
90
United States
70
60
50
World
40
30
China
Source: Heritage Foundation/Wall Street Journal, 2016 Index of Economic Freedom .
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
20
1995
Financial Freedom Score
80
FREEDOM AND ORDER
COMPETING VISIONS
Xi Jinping’s View of Freedom and
Order
“Freedom is the purpose of order, and order the
guarantee of freedom” (WSJ Interview, 2015).
View of Market Liberals
• Freedom is not the purpose of order.
• Freedom is the source of an emergent order.
• “The ‘order’ of the market emerges only from
the process of voluntary exchange among the
participating individuals.”
—James M. Buchanan (1982)
The Invisible Hand
• China needs “to make good use of both the
invisible hand and the visible hand.”
—President Xi Jinping (2015)
• But the invisible hand doesn’t work well
without the freedom that stems from
widespread private property and limited
government.
Wu Wei & Spontaneous Order
• “Through my non-action, people are
spontaneously transformed.”
• “Through my non-interfering (wu
wei), people spontaneously increase
their wealth.”
—Lao Tzu (6th century B.C.)
Lao Tzu
The Tao of the Market
“When all work willingly at their trade,
… things will appear unsought and
people will produce them without
being asked [commanded].”
—Sima Qian
(Han, 206 BC to 220 AD)
Sima Qian
The Tension between State and
Market
• “When taxes are too high, people go hungry.”
• “When the government is too intrusive, people
lose their spirit.”
• “Act for the people’s benefit. Trust them;
leave them alone.”
—Lao Tzu
Spontaneous Order and the Rule of
Law
• Spontaneous order is not independent of the
institutions w/in which individuals make
choices.
• Han Fei Tzu blended Taoist thought with
Legalism (3rd century B.C.): Rules are
necessary to ensure that freedom generates
harmony by limiting state power and adhering
to equality under the law.
Han Fei Tzu’s Liberal Legalism
• Self-interest postulate
• Theft vs. voluntary exchange
• Need for laws against plunder by individuals
and the state. Confucian virtue is not sufficient
for social order.
• The ideal of “Great Good Government”—If
everyone is subject to the law and people are
free to choose, social and economic harmony
will result.
Han Fei Tzu
Equality under the Law
• “When ruler and minister, superior and
inferior, noble and humble all obey the law,
this is called having Great Good Government.”
—The Kuan Tzu
Li Keqiang’s Vision
• “Everyone is equal before the law.”
• Government should “eliminate roadblocks and
pave the way for people to tap their
entrepreneurship.”
• Fight corruption and rent seeking by
“institution-building.”
—Li Keqiang (2015)
China’s Challenge
• “To get the relationship right between the
government and the market.”
• To defeat vested interests—”taking a knife to
one’s own flesh.”
• To boost the “vitality of the market.”
—Li Keqiang (2015)
A Free Market for Ideas
• More freedom, less power.
• “When the market for goods and the market
for ideas are together in full swing . . . Human
creativity and happiness stand the best chance
to prevail.”
—Ronald Coase and Ning Wang (2012)
Dornzi
RISKS AND IMPLICATIONS
FOR THE GLOBAL
ECONOMY
Risks
• “Inciting more spending through taking on higher
levels of debt . . . cannot go on forever.”
—William R. White (OECD 8/14)
• Dollar liabilities of foreign borrowers
• Fed’s exit strategy and rate normalization
• Asset bubbles
• Government debt resistance
• Letting the Tiger’s tail go
• TBTF
Implications
• Structural Change Difficult but Necessary for
Long-Run Growth
• China and the U.S.
• Avoiding a Trade War
• Ending Fiscal Dominance and Financial
Repression
• Creating a Harmonious Global Financial
Regime
“Monetary Policy Is Not a Panacea”
A Tiger by the Tail