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March 23, 2007


Chris Miller

Can you please expand on this for us mere humans? I get the McKibben POV. I understand the environmental risks - though I'd suggest "downside" might be a better term, if a bit weak. Easy.

I don't get the "hedge fund in reverse" part; that implies something that would increase the spread on risk (a hedge fund is supposed to offset risk spread, right?).

What does "political risk to growth" mean? Here in Maine US we have this meme called GrowSmartMaine - where the political class (developers, bankers, foreign corporations) are framing last-ditch "growth" to their advantage - is that it? Or is it the Chavez challenge to neo-(liberalism|conservativism)? Or just us run-of-the-mill citizens fed up with burning trash/PCBs/mercury/lead/toxics upwind as "economic development". Ooops, sorry, that's a FELONY in Maine now, to post a billboard on the gate to the incinerator putting a statement like that into *writing*. Bust me.

...political risk to growth is seriously under-priced by the domestic and global communities of investors...

What does that mean? "political risk to growth is seriously underpriced" Is it me, fed up with Hannafords' aka Albertsons' aka one-of-half-a-dozen-food-merchants totalizing the food chain? Vegetables worth only half what they were (nutritionally) 50 years ago because of soil depletion. Toxic waste comes to mind. Or is it Nigeria; a whole other order of magnitude economically, structurally and environmentally?

WTF does "political risk to growth" mean? On the face of it, that there is a political risk to growth - not at all the consensus trance.

cfm in Gray, ME

Dave Iverson

CM: "I don't get the "hedge fund in reverse" part; that implies something that would increase the spread on risk (a hedge fund is supposed to offset risk spread, right?)."

I think I started to blog international finance/personal finance in order to better understand the risks and benefits of hedge funds. I'm still confused. But this might help answer your question:

From answers.com, "hedge fund":

"It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return on investment."

Back to my notions: I think that Brad DeLong was referring to the fact that the People's Bank of China dumps surplus dollars into US Treasury (they buy our public debt) knowing that they will very likely get less in return for their "investment" than they put in, which wouldn't do for a hedge fund 'cause hedge funds are about seeking 'alpha' (return) and lots of it.

In a broader picture, China is getting a lot out of the deal, at least for now: lots of hot-money foreign investment into their economic "private sector," accumulating a lot of knowledge- and technological- capital, etc. AND: They may be hoping to do as the US did early in the last century : wrest control of the World's number one currency from the "Hegemon" -- from the US. Most observers doubt that China is seriously fishing for this, although there are distinct advantages that they'd like to have and the US doesn't want to lose. For all this China is willing to write down a lot of their declared "capital". Such is the geopolitical game as I understand it.

CM: "What does 'political risk to growth' mean?"

I think Buiter's point is that nobody has tried the type capitalistic regime, as Robert Heilbroner would call it, that China is now trying. PS. Heilbroner calls our form of capitalism/government a regime too. See his very good little book BEHIND THE VEIL OF ECONOMICS.

CM: "...political risk to growth is seriously under-priced by the domestic and global communities of investors..." What does that mean?

I think that Buiter is referencing the notion that politics might kill the momentum of what I like to call the bubble markets. And that short-sighted investors are betting on the world as it has been, not the world that might be. (Yes, despite all the chatter of markets pricing-in all future decisions, markets are notorious for periods of irrationality: optimism AND pessimism). Political risks include: protectionist US politics (e.g. from the Dems seeking jobs protection for workers and unions), or some political upheaval in China from those who might stand to lose if the play turns worse for China than for the US, and many believe it will, e.g. hot markets turn cold, Japan style troubles for China, AND the troubles with capital write-offs that Brad DeLong talks about as the US Dollar continues it treck downward. DeLong's point is, I think, that China is pandering to its new-found capitalists at the expense of the people. Has a familiar ring on this side of the pond, no?

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