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mises
Joined: 05 Nov 2007
Location: retired
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 Posted: Mon Mar 15, 2010 9:09 pm Post subject: |
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Andy Xie:
http://english.caing.com/2010-03-15/100126807.html
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Aging has disastrous consequences for asset prices. Property, for example, must be a permanent bear market. Declining population means declining demand for property. As property is a long-lasting asset, permanent surplus is likely, exerting a constant downward pressure on property prices. Japan's property prices have been declining at about 7 percent per annum for nearly two decades. The rental yield happens to be similar to the price decline. Foreigners are enticed by Japan's high rental yield from time to time. Few have made money.
An aged economy is a stagnant economy. Hence, corporate profits are likely to be stagnant. Without growth, stocks should be very cheap, say, around 10 times earnings and 5 percent dividend yields. Japan's stocks were trading at above 70 times earnings at their peak. They have been falling for two decades. Foreigners are sometimes attracted to the improving valuation of Japan's stock market. Periodic foreign buying causes market upturns, but all have turned out to be value traps.
Aging gracefully seems to be the path that Japan is pursuing. Other economies may not be able to do so. Italians have been demonstrating to defend a retirement age of 55. Greeks are waging pitched street battles against police to defend government benefits. Europe will have more trouble than Japan down the road. The Greek debt crisis is a leading indicator for Europe as a whole.
Is it possible to prevent or reverse economic aging? I doubt it. Declining birthrates and rising life expectancy are powerful forces. However, it is possible to slow the aging process. Immigration, for example, is often cited as a solution. Immigrants are supposed to come from developing countries. But aging is discernible in emerging economies, too.
China's demographics, for example, will be quite similar to those in developed economies in less than 20 years. India may be another 20 years behind.
Wrong policies could exacerbate the aging process. High property prices during high growth periods represent the worst policy for the long term. Japan's high property prices in the 1970s and '80s increased the cost of child-rearing and decreased birthrates. China has both high property prices and a one-child policy, so its long term consequences will be severe. While Chinese people are excited about property now, the market could enter a bear market worse than Japan's when the full force of aging hits, probably in less than 15 years.
Aging is supposed to be deflationary. Japan's experience supports that theory. However, deflation is possible only because governments can borrow to cover the cost of aging. When debt is unsustainably high, inflation is inevitable. Inflation is a form of reneging on promised benefits. I'm afraid the world is heading that way. |
Chinese demographics suggest that she'll get old before she becomes rich.
Also, yes. High property prices likely do lower birthrates. Another gift to the world from central banks. |
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mises
Joined: 05 Nov 2007
Location: retired
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Wed Mar 17, 2010 7:28 am Post subject: |
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China is all over the news these days:
http://www.nytimes.com/2010/03/15/business/global/15yuan.html?ref=business&src=me&pagewanted=print
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China Uses Rules on Global Trade to Its Advantage
HONG KONG � With China�s exports soaring, even as other major economies struggle to recover from the recession, evidence is mounting that Beijing is skillfully using inconsistencies in international trade rules to spur its own economy at the expense of others, including the United States.
Seeking to maintain its export dominance, China is engaged in a two-pronged effort: fighting protectionism among its trade partners and holding down the value of its currency.
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To maximize its advantage, Beijing is exploiting a fundamental difference between two major international bodies: the World Trade Organization, which wields strict, enforceable penalties for countries that impede trade, and the International Monetary Fund, which acts as a kind of watchdog for global economic policy but has no power over countries like China that do not borrow money from it.
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In addition, Beijing has worked to suppress a series of I.M.F. reports since 2007 documenting how the country has substantially undervalued its currency, the renminbi, said three people with detailed knowledge of China�s actions.
China buys dollars and other foreign currencies � worth several hundred billion dollars a year � by selling more of its own currency, which then depresses its value. That intervention helped Chinese exports to surge 46 percent in February compared with a year earlier.
Many prominent academic economists see a basic contradiction in the global system of oversight on trade and currency.
�Many of us would like to see the W.T.O.-style commitments � with people�s feet being held to the fire � at other international agencies, like the I.M.F.,� said Jagdish Bhagwati, a Columbia University economist.
Western countries hoped last year to bring international pressure to bear on China, after years of complaining that Beijing keeps the renminbi artificially low.
An undervalued currency keeps a country�s exports inexpensive in foreign markets while making imports expensive. That makes a trade surplus more likely, reducing unemployment for that country while increasing unemployment in its trading partners.
Last September, President Obama, President Hu Jintao of China and other leaders of the Group of 20 industrialized and developing countries agreed in Pittsburgh that all the G-20 countries would begin sharing their economic plans by November. The goal was to coordinate their exits from stimulus programs and prevent the world from lurching from recession straight into inflation.
The G-20 leaders agreed that the I.M.F. would act as intermediary.
But two people familiar with China�s response said that the Chinese government missed the November deadline and then submitted a vague document containing mostly historical data. These people said that China feared giving ammunition to critics of its currency policies at the monetary fund and beyond. Both people asked for anonymity because of China�s attitudes about its economic policies.
If China is found to be manipulating its currency, it could be a political and economic challenge for the Obama administration. President Obama called on Thursday for China to introduce �a more market-oriented exchange rate.� China�s defiant response keeps the administration in a difficult position.
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The main indicator of a country�s intervention in currency markets is its level of foreign reserves. China halted the gradual appreciation of the renminbi against the dollar in July 2008; from June 30, 2008, through Dec. 31 of last year, China�s foreign exchange reserves rose by $590 billion. A small part of the increase reflected interest on bonds, the appreciation of stocks and currency fluctuations. |
http://www.bloomberg.com/apps/news?pid=20601087&sid=aNZe4JWeV1aw&pos=4
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March 17 (Bloomberg) -- China is in the midst of �the greatest bubble in history,� said James Rickards, former general counsel of hedge fund Long-Term Capital Management LP.
The Chinese central bank�s balance sheet resembles that of a hedge fund buying dollars and short-selling the yuan, said Rickards, now the senior managing director for market intelligence at McLean, Virginia-based consulting firm Omnis Inc.
�As I see it, it is the greatest bubble in history with the most massive misallocation of wealth,� Rickards said at the Asset Allocation Summit Asia 2010 organized by Terrapinn Pte in Hong Kong yesterday. China �is a bubble waiting to burst.�
Rickards joins hedge fund manager Jim Chanos, Gloom, Boom & Doom publisher Marc Faber and Harvard University professor Kenneth Rogoff in warning of a potential crash in China�s economy. The government has raised banks� reserve requirements twice this year after economic growth accelerated and property prices rallied.
China has pegged the yuan to the dollar since July 2008 to help exporters weather the global recession. The central bank buys dollars and sells its own currency to prevent the yuan strengthening, driving foreign-exchange reserves to a world- record $2.4 trillion as of December. |
It's hard to know what exactly is going on over there. |
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The Happy Warrior
Joined: 10 Feb 2010
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| Posted: Fri Mar 19, 2010 10:35 am Post subject: |
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Fransisco Sisci references the article Mises posted a few posts up:
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In Britain's Daily Telegraph, Ambrose Evans-Pritchard wrote:
China has succumbed to hubris. It has mistaken the soft diplomacy of Barack Obama for weakness, mistaken the US credit crisis for decline, and mistaken its own mercantilist bubble for ascendancy.
China is becoming surer of itself, verging on arrogance. Beijing doesn't trust American leadership in the crisis. And in turn, the US feels snubbed and reviled as its intellectual leadership through a time of global economic distress cuts less ice in China. It maybe ultimately is an issue of a clash of moods. But, only the totally arrogant fail to pay attention to the mood of others. |
Bold is mine. China is undeniably becoming more certain of itself, after discarding its 'Let others lead' policy from the last century. But as the US showed in the 00s, self-certainty in geopolitics is often a sign of madness and decline. China has yet to feel the full bite of the economic crisis, but who today doubts that it will too suffer (its people has already suffered in the gov't's hidden taxes on growth)?
Not that American leadership should be trusted. This lack of trust is characteristic of the economic crisis, and rightly so. The breakdown of the system is as much as anything a breakdown in the global economic kumbaya. |
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mises
Joined: 05 Nov 2007
Location: retired
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Mon Mar 22, 2010 5:14 am Post subject: |
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http://news.bbc.co.uk/2/hi/business/8579528.stm
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US business feeling unwelcome in China, says survey
US companies feel increasingly unwelcome in China because of what they see as discrimination and inconsistent legal treatment, according to a survey.
The American Chamber of Commerce in China (ACCC) found 38% of its members felt unwelcome, from 26% last quarter.
Inconsistent regulation and judicial treatment topped the list of concerns for American businesses, ACCC found.
It follows alleged cyber attacks on Google, and Chinese claims that the firm is too close to the US government.
Companies surveyed by the ACCC cited claims that Beijing wanted to squeeze foreign technology companies out of the multi-billion dollar market for selling computers and office equipment to government departments.
New rules stipulate sellers of high-tech goods must contain Chinese intellectual property as part of an "indigenous innovation" campaign, in order for them to be included in a government procurement catalogue.
"The survey shows that US companies believe they face product discrimination in state-owned enterprise purchases, as well as in government procurement," the survey said.
Of the American technology companies surveyed, 57% said they expected the preferential purchasing policy to have a negative impact on their operations in China while 37% said they were already losing sales.
Member-companies believed some policies in China were "increasingly restrictive and protectionist" which could limit foreign participation in the world's third largest economy, the survey said.
The survey was released as the trial opened in Shanghai of four employees of Anglo-Australian miner Rio Tinto on allegations of bribery and espionage.
The defendants were arrested last July during contentious iron ore contract negotiations that later collapsed. |
I'm not surprised. Maclean's ran an article in 2007 stating that virtually all Canadian firms operating in China run a loss year after year. The primary reason for this was that the firms were defrauded by their local partners and the refusal of the state to enforce contracts.
Andy Xie on the property bubble:
http://english.caing.com/2010-03-22/100128789.html
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(Caixin Online) Beijing has unleashed another round of property market tightening measures, and this time it's tightening mortgage loan terms considerably: The mortgage interest discount has been reduced for first-time homebuyers; the discount has been abolished and down payment requirement raised to 40 percent for second-time homebuyers; and rates are at banker discretion while the required down payment has been raised to 60 percent for third-time buyers.
Predictably, sales volumes in the primary and secondary markets have collapsed. But no one is panicking, not even those who live off the property bubble. Why? Aren't they supposed to be terrified when Beijing cracks down?
It seems we have seen this movie before. Beijing launched property tightening measures several times in the past but then relaxed as soon as the market felt the bite. The bottom line is that local governments, and Beijing through them, depend very much on property for fiscal revenues. And now, the market does not believe the government will cut off the hand that feeds it.
Local governments and developers are sitting on massive amounts of liquidity they raised last year through land and property sales and borrowings while taking advantage of an "anything goes" window open during the economic stimulus period. They seem to think Beijing will change its mind before their liquidity runs dry, so they are comfortably waiting without cutting prices.
Current lending terms effectively keep second- and third-time homebuyers out of the market. Thus, to sell now, developers have to cut prices to levels affordable to first-home buyers with low incomes and little wealth. But cutting prices doesn't make sense if Beijing is expected to loosen again soon.
This game will continue until Beijing proves its credibility. And it can only prove its credibility by maintaining a tight market policy until local governments and developers run out of money. After that, everyone will have to play by new rules.
Resettlement Role
Contrary to Beijing's policy intent, local governments are readying for another round of property inflation. Local governments have been using bank loans to resettle residents, and resettlement costs have skyrocketed since those being moved need enough compensation to buy properties at today's prices. Unless property prices rise considerably, local governments will end up losing money, which they cannot afford.
Such resettlements played an important role in supporting demand for property last year. The overwhelming majority of end-user purchases probably came from resettled residents who used their compensation cash for down payments. Resettlement compensation is the biggest transfer of wealth from the government to the household sector since the privatization of low-cost public housing a decade ago. It is probably the most important government action supporting today's economy.
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China's property market is a massive bubble. The stock of residential properties, developer inventories and land pledged to banks by local governments exceed by three times the nation's gross domestic product. Rental yields in most cities fail to cover depreciation costs. The price-to-income ratio, a measure of housing affordability, is routinely above 20 in major cities, which means an average Chinese citizen would spend his or her entire income for 20 years to buy an average-priced property.
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The longer the bubble continues the more painful any adjustment. The first tier cities have price levels similar to American and European first tier cities, without anything near similar wages. Maybe the comparisons to 1989 Japan are appropriate. But China has defied gravity for so long even I'm starting to question the relevance of fundamentals. |
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chellovek
Joined: 29 Feb 2008
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| Posted: Wed Mar 24, 2010 2:30 am Post subject: |
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"But China has defied gravity for so long even I'm starting to question the relevance of fundamentals."
Yes, because China has been growing rapidly for 30 years with resulting price bubble ssuggests that fundamentals may not be relevant it may continue indefinitely, nay, for eternity. 
Seriously though, people were saying rubbish about laws of economics being transcended back in the late 1990s, it's nonesense. If there's a problem with the prices it'll get dealt with one way or another.
As for American companies facing discrimination- oh waa waa waa. The Chinese can let who they like in I suppose, like it or not, right or wrong. |
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mises
Joined: 05 Nov 2007
Location: retired
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The Happy Warrior
Joined: 10 Feb 2010
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| Posted: Wed Mar 24, 2010 6:49 pm Post subject: |
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| mises wrote: |
http://www.cnbc.com/id/15840232?video=1449768195&play=1
^ Good discussion. |
Murrin's criteria for decline, influence over Iran and being able to stop North Korea from getting nuclear weapons, are rather colored by the supreme expectations the West has for America. America was a hyperempire for about 15 years, starting from the collapse of the Berlin Wall and ending soon after the collapse of the twin towers. During that time it had unprecedented military reach and economic influence. Now, its apparent that this power was unsustainable over the long-term. However, America is still in full control of its hemisphere and no conventional force can challenge it (IMO, its most serious security challenge lies with Mexico). The same cannot be said for China, not today, and probably not in 20 years. China's interior is much smaller than its borders, and it has had a historical handicap (think thousands of years) asserting policy over any place more than 250 miles from the capital. Furthermore, China's military is occupied in occupying its periphery (Xizang, Xinjiang, Dongbei), which Westerners think of as its own country. Part of its periphery is even allied with the United States (Taiwan).
Secondly, few Americans underestimate China. Quite to the contrary, Americans believe China is the leading economic power (they're wrong).
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| In February 2008, 41% said the U.S. was the top economic power while 30% said China. Somewhat fewer people now say China is the top economic power than named Japan as the leading economic power in the late 1980s (58% in 1989). |
Thirdly, China has outwitted the West for a longtime, but that has ceased happening within the past several years. Watch how Washington engaged Putin, China's only significant ally, to put sanctions on Iran. The China Daily was screaming about Obama's plot to get China to accept Saudi instead of Iranian oil, because the Chinese know their energy needs are being held hostage.
Fourthly, Murrin's interlocutor is correct, China faces massive demographic challenges. China will not take the front seat in 15 years. It just won't (I like the male risk capital point, though). 500 million Chinese, at least, live medieval conditions. That is China's challenge and its focus. If it expends significant resources to project power, it will unravel internally. China's military spending is simply necessary to counteract American power, and the power of its allies encircling China, India, Japan, South Korea, Australia.
Murrin is just another Westerner, and its no shock that he's British, looking at China through the lens of Western fear and naivete. |
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mises
Joined: 05 Nov 2007
Location: retired
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Thu Mar 25, 2010 8:16 pm Post subject: |
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Is China blowing bubbles?
Posted by Neil Hume on Mar 25 10:10.
Yes, says Citigroup�s Willem Buiter, who thinks the Chinese authorities will fail in their efforts to prevent a classic boom, bubble and bust asset sequence.
Higher interest rates, renminbi appreciation and additional macro-prudential controls have all been mooted as way to prevent booms and bubbles developing in the Chinese land, property and stocks markets. However, Buiter says these measures are unlikely to implemented in time.
The countdown has begun. |
http://ftalphaville.ft.com/blog/2010/03/25/186756/is-china-blowing-bubbles/
^ Good read. |
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The Happy Warrior
Joined: 10 Feb 2010
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| Posted: Fri Mar 26, 2010 4:28 am Post subject: |
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| Vitaliy N. Katsenelson wrote: |
We look at China and are mesmerized by its 1.3 billion people, its achievements of the past decade, its recent economic resiliency, and its ability to achieve spectacular results on the fly. But we have to remember that economic bubbles are usually just a good thing taken too far. The Chinese economy is no exception. Its long-term future may be bright, but in the short run we�ve got a bubble on our hands.
Everyone wants a shortcut to greatness, but there isn�t one. China has been trying to bend the laws of economics for a while, and with the control it exerts over its economy it may seem that it�s succeeded. |
This is dead right. |
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The Happy Warrior
Joined: 10 Feb 2010
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| Posted: Mon Mar 29, 2010 6:17 pm Post subject: |
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The Rio Tinto Verdict has been delivered.
China and Rio Tinto: Steel Trap
(http://www.economist.com/business-finance/displaystory.cfm?story_id=15807361&source=features_box1)
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It is unclear how the bribery allegations were linked to those of commercial espionage, since the latter charges were heard behind closed doors�even Australian diplomats were barred from the hearing. According to some reports the court was told that that the four had got their hands on a confidential memo from a meeting of the Chinese steelmakers� association, containing details of their negotiating position in the talks with Rio and other big ore producers. Depending on how they had done so, that might have strengthened the case against them. But before the trials, Western mining executives had assumed that the four were being treated as criminals for simply gathering basic information about their negotiating partners� likely demand for ore�the sort of thing that is rarely considered secret elsewhere in the world.
China�s authorities, and many of its citizens, will insist simply that crimes were committed and appropriate penalties handed down. Rio swiftly announced that it was dismissing the four. But their case has left unresolved questions about what constitutes a crime in China, and whether its law is being applied consistently. The Rio four were convicted of taking bribes and receiving sensitive information but, so far, no one from a Chinese company has been charged with paying the bribes or providing the information. Local employees of multinationals are likely to draw the chilling conclusion that unpleasant consequences will follow if ever they fall afoul of China�s interests. |
But Rio Tinto will not go the way of Google. After all, there are still profits to be had in China for the ore company.
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| Even so, Rio is already making efforts to move beyond the case. Earlier this month it agreed to enter a big joint venture in Africa with Chinalco. Rio�s boss, Tom Albanese, has acknowledged that he does not want to put the firm�s ties with China at risk. The state-owned metals company�which is already Rio�s biggest shareholder despite the abandoned plan to increase its stake�has said it is actively seeking seats on the miner�s board. This would, in effect, place representatives of China�s government inside the firm. Meanwhile negotiations are under way for this year�s round of iron-ore price-setting, and once again�unhelpfully for China�prices on world markets are rising. This time, though, the talks are being held outside the country. |
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The Happy Warrior
Joined: 10 Feb 2010
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| Posted: Wed Mar 31, 2010 12:53 am Post subject: |
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More background on Rio Tinto.
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Yesterday a Chinese court sentenced four executives of Australian mining company Rio Tinto to lengthy prison terms for bribery and stealing commercial secrets.
China's large state-owned steelmakers bought at the benchmark price negotiated by Japanese and Korean mills, while smaller firms had to pay the higher spot price. This created an incentive for arbitrage and corruption, but unfortunately both the Chinese government and the mining companies were slow to take account of this in their internal controls.
As demand soared, the benchmark and market prices for iron ore diverged and the system came under increasing stress. In 2008, the Brazilian mining giant Vale negotiated a new benchmark price, only to see its two Australian rivals, BHP Billiton and Rio Tinto, refuse to follow it.
Then Rio Tinto also began to back out of its contracts, for instance by invoking clauses in contracts to hold back 10% of deliveries, which could then be resold at the spot price. Since Rio was facing a hostile takeover bid from BHP, the company's managers pushed especially hard for every last dollar at the expense of their trading partners to show that they could deliver higher returns for shareholders.
Everyone doing business in China should be clear by now on the rules�there is no rule of law. Deals can be done on the basis of mutual trust, which creates some level of certainty. The four Rio Tinto executives may be guilty of corruption, but the real reason they are in prison is because that trust broke down. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Fri Apr 02, 2010 7:11 am Post subject: |
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Very interesting lecture:
http://www.youtube.com/watch?v=99HNFCn5RP8
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| Chanos Sees `Overheating and Overindulgence' in China |
Any Xie's latest is one of his best:
http://english.caing.com/2010-04-01/100131086.html
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Put Down Trade Spats, Pick Up a Mirror
(Caixin Online) A confrontation between China and the United States is looming sooner than I expected. Quite likely, the U.S. Treasury Department will name China a currency manipulator in its April report to Congress. Such a conclusion would require that the Obama administration impose punitive tariffs on Chinese imports.
China may be tempted to strike back with a trade-war volley. But such a move would be in China's worst interests. China is the biggest beneficiary of globalization and must do everything possible to defend the global trading system. So its best response, in my view, would be to take the case to the World Trade Organization, even though any resolution would be a long time coming and would not help the current situation.
China also would be wrong to stoke a dispute with the United States in hopes of diverting attention from its domestic problems. China's biggest challenge today is how fruits of its economic growth are divided, not how fast the economy is growing. And a key to this dividing game is held by the middle class, which deserves support.
Unfortunately, a middle class squeeze is under way that is a bigger threat to China's economic development than slower export growth. High property prices have turned into an unfair tax on the middle class while, in numerous cases, powerful people are enriched. A bit more economic growth will not solve this problem. Meanwhile, low interest rates in an inflation era are actually taxing savers to benefit two classes of borrowers � state-owned enterprises and speculators. Thus, low interest rates are mainly a kind of middle class tax.
The United States is picking a fight with China because it can't resolve internal problems. Since the financial crisis began, 9 million households have lost homes because they could not or did not want to make mortgage payments. Another 10 million households have negative equity in properties and could be forced or decide to give up homes. That's 15 percent of all U.S. households. Meanwhile, the U.S. unemployment rate stands at around 10 percent, and the federal government's deficit is more than 10 percent of GDP. The biggest state, California, faces bankruptcy.
How could a single economy face so many major problems all at once? The immediate cause was the credit-cum-property bubble burst, although the real villains in this case got away with the loot in the confusion after the big bang. Short-sellers were blamed for puncturing the bubble, but guilty parties with power were not.
Bubble Trouble
An asset bubble has many aspects. Most people understand it as the rollercoaster ride for prices. For example, Hong Kong's property prices quadrupled between 1990 and '97, then fell 75 percent between 1997 and '03. In other words, it was a 13-year round trip. China's A-share market index rose from 1,000 in 2005 to 6,100 in 2007 and fell to 1,600 in 2008 � a round trip that lasted three years.
Why are bubbles so harmful? Because three dynamics are at work:
1) Taking advantage of most bubbles are a few insiders who know how to rob ignorant people. This redistribution aspect can haunt an economy for years after a big bubble bursts.
For example, most subprime mortgage brokers knew they were lending to people who could not repay. Wall Street traders who bought mortgages from these brokers and sold them in pools or CDOs knew the brokers were incentivized to sell poor quality stuff. But the traders didn't care because they received bonuses for selling the stuff to someone else. Fund managers who bought the CDOs probably knew they would go bad eventually. But they, too, decided to look toward annual bonuses for each year of performance.
The people who got hurt didn't even know what was coming because they were savers who put money in pension funds, bought insurance products, or invested in bond funds.
The reallocation game isn't restricted to the financial sector. Profits as a share of GDP from corporations � and not just the financial sector � reached historic highs during the bubble period, while relative wages slipped to all-time lows. Thus, the whole corporate sector was monetizing the bubble. And now, the U.S. corporate cash stash as a share of total assets is at a record high.
2) Money tends to be spent in the wrong way or overspent in a bubble. Economists call wrong spending "misallocation of resources," which means the pie doesn't expand as fast as it should. Overspending involves money that one thinks he has but actually doesn't have. So when a bubble bursts, he's chased by creditors.
etc |
It is an outstanding piece.
Warrior, do you read MPettis?
http://mpettis.com/2010/04/how-will-us-savings-rate-rise-if-you-don%E2%80%99t-penalize-consumption/
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How will US savings rate rise if you don�t penalize consumption?
April 2nd, 2010 by Michael Pettis | Filed under Balance of payments, Consumption and production.
There seems to be a thaw in the currency war. President Obama and President Hu had a long telephone conversation today and my guess is that the Treasury will hold off on naming China a currency manipulator in two weeks. I hate to be a pessimist, but this might be very temporary. Unless the US and China, with the involvement of Japan, Germany, and deficit Europe, don�t work out very quickly a real agreement, in which surplus countries make serious efforts to create domestic demand over the next several years, and to reduce their surpluses, in exchange for which the deficit countries agree to slow down their domestic adjustments, the fight will only be very temporarily postponed, and the next round will be much angrier.
Any agreement must deal with more than the RMB. It must involve the whole range of issues which depress consumption in the surplus countries and force it up in the deficit countries. That means that not just the currency, but also interest rates and credit expansion (and workers wages, if anyone dares to address that). I suspect an important part of the discussion will involve Chinese attempts to reduce savings by improving the social safety net, since this is widely believed to be a reason for China�s high savings, but as I have written many times, I think this issue is largely irrelevant.
My guess is that, unfortunately, along perhaps with promises on the social safety net, the currency will be the main topic. On that topic, Daniel Ikenson of the Cato Institute has an OpEd piece in today�s Wall Street Journal in which he worries that �forcing China to appreciate its currency through sanctions will impose higher prices on American consumers, thereby reducing Americans� real incomes.� Steve Roach made the same point in his Financial Times OpEd piece last week, and this is one of the most widely-cited reasons for opposing RMB appreciation or, what amounts to the same thing, dollar depreciation. But while it may be true that a depreciation of the dollar reduces the real value of current household income, it only reduces household income overall if you assume it has no employment effect.
But why make that assumption? I am pretty sure Paul Krugman, who recently had a spat with Roach on the subject of RMB revaluation, would agree 100% with both Roach and Ikenson that dollar depreciation, or RMB appreciation, would have no beneficial effects for the US if he also believed that it would have no impact on reducing US unemployment.
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In the US, with its high unemployment rate, if this shift in demand causes unemployment to fall, it will cause nominal US household income to rise. If the positive impact on overall household income of depreciation (the rise in employment) is greater than the negative impact (higher prices for imported goods), which is very likely, the net effect will be a real increase in household income, not a reduction.
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An important part of the reason for both problems is that Chinese consumers are effectively subsidizing American consumers. An undervalued exchange rate and repressed interest rates mean that Chinese households have transferred part of their income to Chinese producers to lower the cost of production. This cheap cost is transferred via exports to American and other consumers. This effect is magnified by the stupendous ease with which the American financial system can convert recycled capital inflows into incredibly foolish consumer lending.
Given the magnitude of the effective subsidy for American consumers, and the even greater magnitude of the penalty for Chinese consumers, it is perhaps not so surprising that US households are consuming too much and Chinese households too little. Now here comes the politically tricky part. If you want US savings rates to rise, it is a waste of time pleading for it. The only way the savings rate can rise is, by definition, if production growth exceeds consumption growth � after all savings is just production minus consumption.
So like it or not, if you want Americans to save more you must agree that either it must make production relatively easier, or consumption relatively more difficult, or both, and as it does this, as long as investment rises more slowly than the increase in savings, the aggregate impact will be a decline in the US trade deficit and, forcibly, a decline in the rest of the world�s trade surplus. A depreciation of the dollar does both.
But of course it is not painless. When people argue that the US savings rate must rise, and at the same time argue that it is unfair to penalize US consumers (which in this context mean removing foreign subsides for consumption), I am always seized with a sense of unreality. We are saying that we must correct the imbalances but it must be done at no cost to the consumer.
I am not sure that is going to be easy. If we subsidize producers to make them produce more, it will be done at someone�s expense � either US taxpayers or foreigners. If we penalize consumers (by removing the existing implicit subsides), clearly they are bearing the cost directly. By eliminating sub-prime lending, we penalized American consumers, and willingly or unwillingly we are going to continue doing so until consumption returns to a more reasonable level. One way or the other, rebalancing the US economy means tilting away from consumption and towards production, and although we can theorize about painless ways of doing it (Get Washington to stop wasting money! Improve education and infrastructure investment!) the fact is that in the short run it will be very hard to do so without penalizing consumption.
By the way China faces the obverse problem. For years Beijing has insisted that it wants consumption to rise as a share of national income, and instead it has declined. Why? Because Beijing wants to tilt the balance towards consumption without having producers pay the cost. In other words it wants producers to continue benefiting from excessively low interest rates and an undervalued currency while exhorting consumers, who pay for the low interest rates and undervalued currency, to buck up and consume more.
That seems to me why this whole rebalancing process is going to be a lot more difficult for both countries than we currently expect. Both countries are eager to rebalance, and even more eager to avoid the price of rebalancing � or better yet, to shift it onto someone else. Perhaps there is a realistic way to achieve both, but it isn�t obvious to me. |
Xie and Pettis reference American over-consumption. It is a significant problem. With more savings comes less need for a social savings net as well. The United States needs much higher interest rates. Xie rightly points out that low interest rates are an assault on the middle class. |
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