The present situation is bad, but so is this option. Not seeing much hope on this front.
http://www.guardian.co.uk/commentisfree/2010/mar/28/will-hutton-china-germany
Quote
If the US declares economic war on China, we should all tremble
China and Germany exploit the global system without accepting reciprocal responsibilities to manage it. It cannot go on
o Will Hutton
o The Observer, Sunday 28 March 2010
o Article history
In the darkest hours of the financial crisis in the autumn of 2008, it was obvious that all nations' economic destinies were intertwined. Today, that sense of a collective global economic interest is receding. On 15 April, a decision in Washington will be taken, the impact of which will be a sharp reminder than in 2010 all still connects. The United States is to rule, unilaterally, whether China is unfairly manipulating its currency against the dollar to promote its exports; if the case is accepted, it's a de facto declaration of economic war and a signal that now it is every country for itself.
The Americans aren't just making a noise. They will back their judgment with a tariff on Chinese imports into the US and China is unlikely to back down. It will fight fire with fire. Other countries, worried that the Americans and Chinese will dump goods on them that were destined for the Chinese and American markets, will feel it is legitimate to protect themselves in turn. Britain's export markets, open for two generations, will regress towards the closure of the 1930. Hopes of economic recovery will be dashed.
It is not just the US and China that are more economically nationalist. The Europeans finally arrived at a deal to help a Greece stricken with a colossal budget deficit last week, but it was hardly an exercise in European solidarity. Germany dragged its feet and only signed up if the IMF led the negotiations and stumped up a third of any bailout funds; there was no hint that Germany itself might increase public borrowing to reflate its economy to help other eurozone countries in trouble. It was Germany first.
The lack of internationalism is hopelessly short-sighted. All the evidence about the aftermaths of credit crunches where there are high levels of private indebtedness is that bank lending grows at a quarter or less of the rate it grew at beforehand, a hugely depressive effect on the economy. But this is a synchronised credit crunch with a synchronised global slowdown in credit; the depressive effect will be global. The temptation for any single country to use trade and currency policy to capture more of the stagnant pool of jobs is ever-present – it is what the Chinese have been doing for years – but when national economies were booming the impact could be shrugged off. Not today.
In Washington, patience is at an end at China's readiness to export unemployment to the US where the rate is already over 10%. There was open dismay at Prime Minister Wen Jiabao's recent claim to China's National Peoples Congress that countries such as the US, which want China to lift its currency and depreciate their own are protectionist. Chinese foreign currency reserves are climbing by $40bn a month. Already, total reserves top $2.4 trillion. Reserves can only grow so much faster than China's current account surpluses because China is printing more of its own currency to supply to world markets to keep its exchange rate down. Put another way, China is rigging its currency to a degree not paralleled in modern times.
The issue unites Democrats and Republicans. In the New York Times recently, Paul Krugman urged that on 15 April Obama act by slapping on a temporary tariff, as Nixon did on European imports in 1971. The notion that the Chinese have the Americans over a barrel because they finance America's deficits is wrong, argued Krugman. China needs the US to keep its markets open.
Krugman is right that China needs to change its policy. But the risk is that unilaterally slapping on tariffs could be self-defeating, causing the world to retreat into protection, competitive devaluation and prolonged recession. A far cleverer strategy would be to try for a global deal, as urged by Michael Pettis, of Carnegie's China Programme. China needs to be given time to reduce its dependence on exports and build its domestic spending, running at risibly low levels. This means boosting workers' wages, probably allowing trade unions, establishing property rights as collateral for borrowing and permitting its currency to rise.
If China gives that commitment, argues Pettis, the US should reply by saying it will maintain high government borrowing to keep American demand buoyant even as private credit grows slowly. It will keep its markets open. The EU should be part of the bargain, too, with the German government in particular spending and borrowing to maintain demand, and Britain taking an even more gradualist approach to lowering its deficit than the one outlined by Alistair Darling in Wednesday's budget. The aim is to keep global public deficits up to compensate for reduced private credit growth while China adjusts its exchange rate. Thus the world might avert trade war.
I like Pettis's grand bargain, but the chances of it happening are close to zero. First, Obama has to take the risk of trying – and of being snubbed by both China and Germany. Reforms such as extending property rights or encouraging worker power directly threaten one-party rule in China, which is why they are resisted. Thus China chose to reflate through investment rather than reform in 2009, increasing its reliance on exports. It is mercantilist, in that it wants to trade one way, because it is an authoritarian state. The party could thus never agree to its side of any bargain. Neither, after last week's dealings over Greece, would Germany's chancellor Angela Merkel. She hasn't got the imagination to be part of a global bargain to lift the threat of trade war. Obama might be tempted to try, but the political risks of rebuff are too high. Equally, he can't allow China to carry on stealing US jobs. I suspect he will tell China it has six months to change its policy – or else.
For years, we have assumed that trade and globalisation are an inevitable part of the landscape. They are not. China and Germany exploit the global system without accepting reciprocal responsibilities to manage it. It cannot go on. The deficit countries, notably the US but also ourselves to a degree, can no longer play the role we used to as importers of last resort. Britain has to build its productive and innovative capacity as does the US. Economic rebalancing has to be both domestic and international – with give and take on both sides.
The trouble is that neither Germany nor China sees their role in this way. The emerging consensus in America is that only strong-arm tactics will persuade them to change, thus the case for tariffs to leverage the international economic rebalancing that is otherwise being avoided. Britain is particularly exposed. In the 1930s, we could shelter behind a British-devised tariff cast round the empire. Today, we are not even in the euro. Darling's budget, and the debate about what he should cut and how fast he should do it, presumes the world in the years ahead will get back to and stay "normal". That seems ever more improbable. In which case – what is Plan B?
Of course we won't declare "economic war on China", you tardface. Too many Republicans make too much money in China.
Quote from: CountDeMoney on March 28, 2010, 07:03:38 PM
Of course we won't declare "economic war on China", you tardface. Too many Republicans make too much money in China.
Couple that with Democratic cowardice, and you have a powerful force for just shutting up and doing whatever the Chinese tell you to do.
So what exactly is Germany's policy that needs to be revised? It can't be that our currency is undervalued. We also have among the highest wages in the world, certainly in the same league as the USA, so we are not exporting unemployment. The government deficit is like 6% of GDP in 2010 so it does already overspend a lot to reflate the economy. I don't think going to 12% levels of Britain or the USA would make sense at this point - especially when you consider that everybody is saying that those levels are too high. So what can the government do? I read that Germany should rise wages. Maybe. But this is not a command economy, so there is no way the government can make industry and unions to rise wages if they don't want to. Lowering taxes when you have a huge deficit and it is unpopular won't happen either.
When China is giving me free shit, I with the US government would just STFU. If it has to say something, it should encourage the Chinese to give us more free shit.
Quote from: grumbler on March 28, 2010, 08:23:37 PM
When China is giving me free shit, I with the US government would just STFU. If it has to say something, it should encourage the Chinese to give us more free shit.
There are a lot of long term drawbacks to that strategy.
Quote from: DGuller on March 28, 2010, 08:43:49 PM
Quote from: grumbler on March 28, 2010, 08:23:37 PM
When China is giving me free shit, I with the US government would just STFU. If it has to say something, it should encourage the Chinese to give us more free shit.
There are a lot of long term drawbacks to that strategy.
And those drawbacks are mostly for the Chinese. They are exporting unemployment to Cambodia and Vietnam, true, but that just makes them more unpopular there.
The US trade deficit exists far more because of oil than because of China.
If it did the US would win. If the Chinese tried to trigger a US bond crisis, capital controls could be imposed by the US.
Quote from: CountDeMoney on March 28, 2010, 07:03:38 PM
Of course we won't declare "economic war on China", you tardface. Too many Republicans make too much money in China.
Which Republicans will be making the decision on April 15th?
Quote from: Zanza on March 28, 2010, 07:30:38 PM
So what exactly is Germany's policy that needs to be revised?
Stop making things
Quote from: Kleves on March 28, 2010, 11:39:47 PM
Quote from: CountDeMoney on March 28, 2010, 07:03:38 PM
Of course we won't declare "economic war on China", you tardface. Too many Republicans make too much money in China.
Which Republicans will be making the decision on April 15th?
The ones that paid their taxes?
Don't bite the hand of your creditor...
Unless you plan on defaulting on your debt, which I don't think is happening anytime soon.
Quote from: Zanza
So what exactly is Germany's policy that needs to be revised?
That it exports more than the US does, even though it is far smaller. That is annoying.
Quote from: Martim Silva on March 29, 2010, 07:22:57 AM
Don't bite the hand of your creditor...
I'll keep this in mind the next time some Latin American idiot starts wailing about economic imperialism.
Considering how each country's success ultimately depends on the success of the other at this juncture this looks like a lose-lose proposition to me.
Quote from: Martim Silva on March 29, 2010, 07:22:57 AM
Don't bite the hand of your creditor...
Likewise taking down your biggest customers is a rather bad business decision.
Quote from: grumbler on March 28, 2010, 09:10:07 PM
The US trade deficit exists far more because of oil than because of China.
Source?
Quote
Countries Contributing the Most to U.S. Trade Deficit
The list below shows America's deficit amounts for its top 15 trading partners.
China ... US$259.1 billion (up 11.4% from 2006, up 59.9% from 2004)
Japan ... $83.1 billion (down 6.1%, up 10.5%)
Mexico ... $74 billion (up 15.4%, up 64.4%)
Canada ... $65 billion (down 10.7%, down 1%)
Germany ... $44.5 billion (down 6.9%, down 2.8%)
Nigeria ... $28.9 billion (up 12.5%, up 97.3%)
Venezuela ... $28.4 billion (up 0.6%, up 40.4%)
Saudi Arabia ... $24.5 billion (up 1.8%, up 57.3%)
Ireland ... $21.6 billion (up 7.5%, up 12.5%)
Italy ... $20.9 billion (up 3.7%, up 20.4%)
Malaysia ... $20.8 billion (down 13.2%, up 20.4%)
France ... $14.5 billion (up 12.5%, down 36.9%)
South Korea ... $13.6 billion (up 2.5%, down 31.5%)
Taiwan ... $12.7 billion (down 16.7%, down 1.9%)
United Kingdom ... $6.7 billion (down 16.8%, down 36%).
Top Chinese exports to America are computers, accessories, parts and miscellaneous household goods. Japan's leading exports to the U.S. are passenger cars.
Read more at Suite101: US Global Trade Debt by Country: 2007 American Deficit Statistics for Top Import & Export Partners http://import-export.suite101.com/article.cfm/us_global_trade_debt_by_country#ixzz0jZU19AsL
http://import-export.suite101.com/article.cfm/us_global_trade_debt_by_country
Quote from: Valmy on March 29, 2010, 08:04:55 AM
Considering how each country's success ultimately depends on the success of the other at this juncture this looks like a lose-lose proposition to me.
The seemingly unbreakable interconnection of China (the contender) and the USA (the reigning champion) is one of the best arguments for globalism and free trade ever made. Almost as good a lock this is as MAD was
http://en.wikipedia.org/wiki/Foreign_trade_of_the_United_States
List of countries the US has a significant surplus with is pretty small. Biggest is Netherlands with the US having almost a 20 billion surplus in 2008, followed by Hong Kong with 15.
Quote from: Alcibiades on March 29, 2010, 08:19:50 AM
Quote from: grumbler on March 28, 2010, 09:10:07 PM
The US trade deficit exists far more because of oil than because of China.
Source?
Quote
Countries Contributing the Most to U.S. Trade Deficit
The list below shows America's deficit amounts for its top 15 trading partners.
China ... US$259.1 billion (up 11.4% from 2006, up 59.9% from 2004)
Japan ... $83.1 billion (down 6.1%, up 10.5%)
Mexico ... $74 billion (up 15.4%, up 64.4%)
Canada ... $65 billion (down 10.7%, down 1%)
Germany ... $44.5 billion (down 6.9%, down 2.8%)
Nigeria ... $28.9 billion (up 12.5%, up 97.3%)
Venezuela ... $28.4 billion (up 0.6%, up 40.4%)
Saudi Arabia ... $24.5 billion (up 1.8%, up 57.3%)
Ireland ... $21.6 billion (up 7.5%, up 12.5%)
Italy ... $20.9 billion (up 3.7%, up 20.4%)
Malaysia ... $20.8 billion (down 13.2%, up 20.4%)
France ... $14.5 billion (up 12.5%, down 36.9%)
South Korea ... $13.6 billion (up 2.5%, down 31.5%)
Taiwan ... $12.7 billion (down 16.7%, down 1.9%)
United Kingdom ... $6.7 billion (down 16.8%, down 36%).
Top Chinese exports to America are computers, accessories, parts and miscellaneous household goods. Japan's leading exports to the U.S. are passenger cars.
Read more at Suite101: US Global Trade Debt by Country: 2007 American Deficit Statistics for Top Import & Export Partners http://import-export.suite101.com/article.cfm/us_global_trade_debt_by_country#ixzz0jZU19AsL
http://import-export.suite101.com/article.cfm/us_global_trade_debt_by_country
And anyway, the real world international trade is not quite what it's like in Victoria. Even if there is a resource that you got to import, it doesn't have to result in your country being a net importer. In a floating exchange rate system, the value of the currency changes automatically to counter-act the net trade deficits or surpluses. Of course, floating exchange mechanism is short-circuited when countries peg their currency to the dollar.
Why economic war?
I propose a thumb war.
Quote from: Alcibiades on March 29, 2010, 08:19:50 AM
Source?
Common sense. The US imports more than $13 million barrels of oil per day. At even as low as $60/barrel, that's $780 million a day, or about $285 billion a year. At $80 a barrel (more like the price over the last year) it would be $380 billion a year.
(snip)
Your charts showing trade deficits per country shows nothing about why the deficits exist (oil or otherwise).
Quote from: DGuller on March 29, 2010, 11:50:19 AM
Quote from: Alcibiades on March 29, 2010, 08:19:50 AM
QuoteCountries Contributing the Most to U.S. Trade Deficit
The list below shows America's deficit amounts for its top 15 trading partners.
China ... US$259.1 billion (up 11.4% from 2006, up 59.9% from 2004)
Japan ... $83.1 billion (down 6.1%, up 10.5%)
Mexico ... $74 billion (up 15.4%, up 64.4%)
Canada ... $65 billion (down 10.7%, down 1%)
Germany ... $44.5 billion (down 6.9%, down 2.8%)
Nigeria ... $28.9 billion (up 12.5%, up 97.3%)
Venezuela ... $28.4 billion (up 0.6%, up 40.4%)
Saudi Arabia ... $24.5 billion (up 1.8%, up 57.3%)
Ireland ... $21.6 billion (up 7.5%, up 12.5%)
Italy ... $20.9 billion (up 3.7%, up 20.4%)
Malaysia ... $20.8 billion (down 13.2%, up 20.4%)
France ... $14.5 billion (up 12.5%, down 36.9%)
South Korea ... $13.6 billion (up 2.5%, down 31.5%)
Taiwan ... $12.7 billion (down 16.7%, down 1.9%)
United Kingdom ... $6.7 billion (down 16.8%, down 36%).
Top Chinese exports to America are computers, accessories, parts and miscellaneous household goods. Japan's leading exports to the U.S. are passenger cars.
Read more at Suite101: US Global Trade Debt by Country: 2007 American Deficit Statistics for Top Import & Export Partners http://import-export.suite101.com/article.cfm/us_global_trade_debt_by_country#ixzz0jZU19AsL
http://import-export.suite101.com/article.cfm/us_global_trade_debt_by_country
And anyway, the real world international trade is not quite what it's like in Victoria. Even if there is a resource that you got to import, it doesn't have to result in your country being a net importer. In a floating exchange rate system, the value of the currency changes automatically to counter-act the net trade deficits or surpluses.
To be fair to Alcibiades, I don't think that he is arguing that real international trade is like it is in Victoria.
QuoteOf course, floating exchange mechanism is short-circuited when countries peg their currency to the dollar.
Yes, but the results can be good for the countries using the dollar when countries peg their rates artificially low, as China apparently has. Dollar users get much more value for their currency than a float would provide, for as long as the peg lasts.
If the US stopped buying its underwear from China and bought it from Vietnam instead, underwear prices in the US would go up by a coupla percent. That would be inflationary, and thus bad. Getting that coupla percent free from China sounds like a great deal as long as the Chinese are dumb enough to continue to subsidize American underwear purchases.
Quote from: grumbler on March 29, 2010, 01:13:38 PM
To be fair to Alcibiades, I don't think that he is arguing that real international trade is like it is in Victoria.
I was concurring with him, so that it was pretty clearly directed at you, as I'm sure you knew.
QuoteYes, but the results can be good for the countries using the dollar when countries peg their rates artificially low, as China apparently has. Dollar users get much more value for their currency than a float would provide, for as long as the peg lasts.
If the US stopped buying its underwear from China and bought it from Vietnam instead, underwear prices in the US would go up by a coupla percent. That would be inflationary, and thus bad. Getting that coupla percent free from China sounds like a great deal as long as the Chinese are dumb enough to continue to subsidize American underwear purchases.
In the short term, it's free money, especially if the economy of the dollar country is functioning normally. In the long term, this can encourage systemic imbalances.
What throws off the standard analysis is that we are running a zero interest rate policy and still have minimal inflation. In the short term, there is a good argument that if our currency was allowed to depreciate against the yuan it would not result in any measurable domestic inflation and we wouldn't be stuck with the competitive disadvantage of an overvalued currency (either exporters or domestic companies competing with importers).
Quote from: Martim Silva on March 29, 2010, 07:22:57 AM
Don't bite the hand of your creditor...
Unless you plan on defaulting on your debt, which I don't think is happening anytime soon.
Quote from: Zanza
So what exactly is Germany's policy that needs to be revised?
That it exports more than the US does, even though it is far smaller. That is annoying.
There is a saying in the US. If you owe the bank 100,000 dollars the bank owns you. If you owe the bank 100,000,000 dollars you own the bank.
Anyway, why would we want to have an economic war with China? What the hell good would that do?
Quote from: Razgovory on March 29, 2010, 04:40:02 PM
Anyway, why would we want to have an economic war with China? What the hell good would that do?
It would make me feel better.
To piss off Zombie Nixon.
Quote from: MadImmortalMan on March 29, 2010, 05:07:31 PM
To piss off Zombie Nixon.
That was all about the Soviets though, without them the reasoning falls apart.
Quote from: DGuller on March 29, 2010, 03:17:46 PM
I was concurring with him, so that it was pretty clearly directed at you, as I'm sure you knew.
And since I wasn't arguing that either, this leaves us no choice but to recognize an incoherent strawman for what it is. :D
QuoteIn the short term, it's free money, especially if the economy of the dollar country is functioning normally. In the long term, this can encourage systemic imbalances.
Sure, and that is why the Chinese cannot keep it up forever, and why the US should enjoy it while it lasts, rather than trying to stop it.
There are, after all, far more countries in the world like China than there are ones like the US. If China disappeared tomorrow, the US would buy its underwear from Vietnam and its crappy household electronics from Singapore and Mexico. If the US disappeared tomorrow, where would China sell its underwear and cheap electronics?
Quote from: alfred russel on March 29, 2010, 03:26:24 PM
What throws off the standard analysis is that we are running a zero interest rate policy and still have minimal inflation. In the short term, there is a good argument that if our currency was allowed to depreciate against the yuan it would not result in any measurable domestic inflation and we wouldn't be stuck with the competitive disadvantage of an overvalued currency (either exporters or domestic companies competing with importers).
In what markets do US exporters compete with Chinese exporters or domestic producers? Automobiles? If US automobiles were 33% cheaper in China, how many more would the US sell?
I am not convinced that a 33% increase in the price of all made-in-China goods would not be inflationary, on the other hand.
In fact, for the highest change in exchange rates that would not be inflationary for the US, it is difficult for me to see an industry where the US exports to China would measurably benefit.
Quote from: grumbler on March 29, 2010, 05:46:07 PM
Quote from: alfred russel on March 29, 2010, 03:26:24 PM
What throws off the standard analysis is that we are running a zero interest rate policy and still have minimal inflation. In the short term, there is a good argument that if our currency was allowed to depreciate against the yuan it would not result in any measurable domestic inflation and we wouldn't be stuck with the competitive disadvantage of an overvalued currency (either exporters or domestic companies competing with importers).
In what markets do US exporters compete with Chinese exporters or domestic producers? Automobiles? If US automobiles were 33% cheaper in China, how many more would the US sell?
I am not convinced that a 33% increase in the price of all made-in-China goods would not be inflationary, on the other hand.
In fact, for the highest change in exchange rates that would not be inflationary for the US, it is difficult for me to see an industry where the US exports to China would measurably benefit.
China isn't only propping up the dollar against the yuan, but also against other currencies indirectly.
The argument works on a macro level: there is an identity that a capital account surplus must be offset by a current account deficit. By buying huge volumes of U.S. capital assets to maintain their peg against the dollar, the Chinese are effectively exporting a capital account surplus in the amount of their purchases, or equivalently they are exporting an artificial current account deficit.
This reduces aggregate demand. In ordinary times, we could counteract the reduction in aggregate demand through either monetary or fiscal policy and enjoy lower interest rates. But current monetary policy is constrained through our current zero interest rate policy, and fiscal policy is constrained both politically and due to our already large deficit. What this means in practical terms is that our aggregate demand is lowered, and that will simply lower our GDP.
You are looking at the narrow view--the dollar is weakens, the price of imports increases. That is true. But higher domestic unemployment and increased contraction/reduced growth is deflationary. And imports are still a minority part of our economy.
Quote from: alfred russel on March 29, 2010, 06:05:26 PM
You are looking at the narrow view--the dollar is weakens, the price of imports increases. That is true. But higher domestic unemployment and increased contraction/reduced growth is deflationary. And imports are still a minority part of our economy.
I guess my point is that having a higher yuan (and thus increasing the prices of imported goods) will not suddenly restore the US textile, electronics, or furniture industries. Those businesses moved offshore because transportation costs had dropped by so much that one could no longer make them in the US and compete with
any low-wage country. The lower yuan value simply means that the US buys that stuff from China, not Vietnam or Mexico. So unemployment in the US is little, if any, impacted by the weak yuan, though Chinese, Vietnamese, and Mexican employment obviously is.
If the US was actually trying to export things to China that the Chinese would buy if they were not so expensive, this might be a reason to resent China's yuan peg. But it isn't. The primary US exports (AFAICT) to China are intellectual properties that the Chinese would steal even if they were much cheaper.
Quote from: grumbler on March 29, 2010, 06:42:01 PM
Quote from: alfred russel on March 29, 2010, 06:05:26 PM
You are looking at the narrow view--the dollar is weakens, the price of imports increases. That is true. But higher domestic unemployment and increased contraction/reduced growth is deflationary. And imports are still a minority part of our economy.
I guess my point is that having a higher yuan (and thus increasing the prices of imported goods) will not suddenly restore the US textile, electronics, or furniture industries. Those businesses moved offshore because transportation costs had dropped by so much that one could no longer make them in the US and compete with any low-wage country. The lower yuan value simply means that the US buys that stuff from China, not Vietnam or Mexico. So unemployment in the US is little, if any, impacted by the weak yuan, though Chinese, Vietnamese, and Mexican employment obviously is.
If the US was actually trying to export things to China that the Chinese would buy if they were not so expensive, this might be a reason to resent China's yuan peg. But it isn't. The primary US exports (AFAICT) to China are intellectual properties that the Chinese would steal even if they were much cheaper.
It isn't just a problem with the yuan, by managing the exchange rate to keep the dollar artifically high against the yuan they also keep it artificially high against everything else.
Plus, a lot of american companies are expanding their operations in china as fast as possible--Coca-Cola, Nabisco, Wal Mart, and McDonald's to name a few. The Chinese consumer is going to provide a lot of the world's consumption growth in the next few decades.
Quote from: alfred russel on March 30, 2010, 07:46:18 AM
It isn't just a problem with the yuan, by managing the exchange rate to keep the dollar artifically high against the yuan they also keep it artificially high against everything else.
Which helps the US consumer and harms the Chinese consumer, without harming the US producer. Seems like something I want to keep up.
QuotePlus, a lot of american companies are expanding their operations in china as fast as possible--Coca-Cola, Nabisco, Wal Mart, and McDonald's to name a few. The Chinese consumer is going to provide a lot of the world's consumption growth in the next few decades.
All those companies produce in China what they market in China, so the exchange rate doesn't really effect them much at all (other than to make their profits there worth more). They are, I am sure, delighted with the artificially high exchange rate.
Quote from: grumbler on March 30, 2010, 07:59:59 AM
Quote from: alfred russel on March 30, 2010, 07:46:18 AM
It isn't just a problem with the yuan, by managing the exchange rate to keep the dollar artifically high against the yuan they also keep it artificially high against everything else.
Which helps the US consumer and harms the Chinese consumer, without harming the US producer. Seems like something I want to keep up.
QuotePlus, a lot of american companies are expanding their operations in china as fast as possible--Coca-Cola, Nabisco, Wal Mart, and McDonald's to name a few. The Chinese consumer is going to provide a lot of the world's consumption growth in the next few decades.
All those companies produce in China what they market in China, so the exchange rate doesn't really effect them much at all (other than to make their profits there worth more). They are, I am sure, delighted with the artificially high exchange rate.
You are backwards--a strong dollar makes overseas profits worth less, and for many multinationals the exchange rate is one of the major concerns regarding overall profitability.
It is too bad we can't go back to the Great Depression, with the reduced prices in the era, that was a great time for consumers. :P
Quote from: grumbler on March 30, 2010, 07:59:59 AM
Which helps the US consumer and harms the Chinese consumer, without harming the US producer. Seems like something I want to keep up.
It does harm the US producers if the dollar is too expensive. Their exports are less competitive (and, yes, we do export a bunch of stuff, just not as much as we import).
Quote]All those companies produce in China what they market in China, so the exchange rate doesn't really effect them much at all (other than to make their profits there worth more). They are, I am sure, delighted with the artificially high exchange rate.
Just think things through for a second. If yuan is too cheap, then you need to earn more yuan for the same dollar of profit. How is that making their profits worth more?
Quote from: alfred russel on March 30, 2010, 08:08:06 AM
You are backwards--a strong dollar makes overseas profits worth less, and for many multinationals the exchange rate is one of the major concerns regarding overall profitability.
You are, of course, correct. Higher dollars will make US dollars spent buying stuff in China more economical, but repatriating profits will be problematical. Still, that doesn't make me want to lose my free shit.
QuoteIt is too bad we can't go back to the Great Depression, with the reduced prices in the era, that was a great time for consumers. :P
Indeed, for people who kept their heads and had a bit of money, the Depression was quite profitable.
Not that you comment is not a complete
non sequitur in this conversation, of course.
Quote from: DGuller on March 30, 2010, 08:40:06 AM
It does harm the US producers if the dollar is too expensive. Their exports are less competitive (and, yes, we do export a bunch of stuff, just not as much as we import).
What US exports
to China are made less competitive, and how does that reduce sales to China?
Here is the total list of US exports to China in 2009:
[table]
[tr]
[td]HS# Commodity description Volume % change over 2008
85 Electrical machinery andand equipment 9.5 -16.8
12 Oil seeds and oleaginous fruits 9.3 26.5
84 Power generation equipment 8.4 -13.8
88 Air and spacecraft 5.3 4.5
39 Plastics and articles thereof 4.4 14.1
90 Optics and medical equipment 4.0 6.0
72, 73 Iron and steel *3.5 *6.9
47 Pulp and paperboard 2.5 9.4
29 Organic chemicals 2.4 15.1
87 Vehicles, excluding railway 1.9 2.3[/td]
[/tr]
[/table]Formatting sucks, sorry.
Of those, i can see just a couple (electrical machinery and power generating equipment) that are likely to be significantly price sensitive and exported in significant volume, and both are edeclining already 9maybe because of the exchange rate). $Saving some hunk of a measly $18 billion in trade is not enough to make me want to give up me free shit.
Quote from: grumbler on March 30, 2010, 09:04:20 AM
Quote from: DGuller on March 30, 2010, 08:40:06 AM
It does harm the US producers if the dollar is too expensive. Their exports are less competitive (and, yes, we do export a bunch of stuff, just not as much as we import).
What US exports to China are made less competitive, and how does that reduce sales to China?
Why are you emphasizing "to China"? Did you miss the point that AR was making that China's currency manipulation makes the dollar too expensive in general, and not just in relation to China? It's stated in the quote to which you replied.
Quote from: grumbler on March 30, 2010, 08:56:32 AM
Indeed, for people who kept their heads and had a bit of money, the Depression was quite profitable.
Not that you comment is not a complete non sequitur in this conversation, of course.
It isn't a non sequitor--in the Great Depression, going into the depression, tariffs rose, which typically might be inflationary, but there was actually severe deflation. Why? In large part because of a severe output gap, which is disinflationary. When lots of people are out of work, there is a downward pressure on wages, and when there is reduced demand for products and services pricing becomes increasingly competitive.
Today we have unemployment of close to 10%--another large output gap. Inflation is expected to be very low this year, even though the dollar has depreciated significantly off of last year's highs. I question whether another 20% depreciation would really be inflationary in this environment.
Quote from: alfred russel on March 29, 2010, 06:05:26 PM
The argument works on a macro level: there is an identity that a capital account surplus must be offset by a current account deficit. By buying huge volumes of U.S. capital assets to maintain their peg against the dollar, the Chinese are effectively exporting a capital account surplus in the amount of their purchases, or equivalently they are exporting an artificial current account deficit.
This reduces aggregate demand. In ordinary times, we could counteract the reduction in aggregate demand through either monetary or fiscal policy and enjoy lower interest rates. But current monetary policy is constrained through our current zero interest rate policy, and fiscal policy is constrained both politically and due to our already large deficit. What this means in practical terms is that our aggregate demand is lowered, and that will simply lower our GDP.
You are looking at the narrow view--the dollar is weakens, the price of imports increases. That is true. But higher domestic unemployment and increased contraction/reduced growth is deflationary. And imports are still a minority part of our economy.
I agree with the first para. But a current account deficit does not reduce aggregate demand. This seems to be a confusion of terms - in fact, it is strong aggregate demand that helped facilitate the situtation of current account deficits. What is true is that a current account deficit (ceteris paribas) decreases GDP - that simply follows from the accounting definition of GDP. But if the imports are associated with higher levels of domestic consumption (regardless of the way in which the causal arrow points) there is no net negative impact on GDP.
I do mostly agree with your essential point that a decline in the value of the dollar against the renminbi would not necessarily be inflationary over the short tem, due to the persistance of the deflationary conditions and apparent output gap as noted in your last post.
Quote from: DGuller on March 30, 2010, 09:30:04 AM
Why are you emphasizing "to China"? Did you miss the point that AR was making that China's currency manipulation makes the dollar too expensive in general, and not just in relation to China? It's stated in the quote to which you replied.
I saw that point too, but not an explantion for it. To the extent other currency pairs trade relatively freely, I don't quite get how China can manipulate those rates by setting a dollar target.
Quote from: The Minsky Moment on March 30, 2010, 12:51:24 PM
Quote from: alfred russel on March 29, 2010, 06:05:26 PM
The argument works on a macro level: there is an identity that a capital account surplus must be offset by a current account deficit. By buying huge volumes of U.S. capital assets to maintain their peg against the dollar, the Chinese are effectively exporting a capital account surplus in the amount of their purchases, or equivalently they are exporting an artificial current account deficit.
This reduces aggregate demand. In ordinary times, we could counteract the reduction in aggregate demand through either monetary or fiscal policy and enjoy lower interest rates. But current monetary policy is constrained through our current zero interest rate policy, and fiscal policy is constrained both politically and due to our already large deficit. What this means in practical terms is that our aggregate demand is lowered, and that will simply lower our GDP.
You are looking at the narrow view--the dollar is weakens, the price of imports increases. That is true. But higher domestic unemployment and increased contraction/reduced growth is deflationary. And imports are still a minority part of our economy.
I agree with the first para. But a current account deficit does not reduce aggregate demand. This seems to be a confusion of terms - in fact, it is strong aggregate demand that helped facilitate the situtation of current account deficits. What is true is that a current account deficit (ceteris paribas) decreases GDP - that simply follows from the accounting definition of GDP. But if the imports are associated with higher levels of domestic consumption (regardless of the way in which the causal arrow points) there is no net negative impact on GDP.
I do mostly agree with your essential point that a decline in the value of the dollar against the renminbi would not necessarily be inflationary over the short tem, due to the persistance of the deflationary conditions and apparent output gap as noted in your last post.
The artificial capital account surplus that the Chinese are exporting means that effectively the Chinese are exporting artificial savings to the US economy. The increase in savings during an economic downturn results in a reduction of aggregate demand (see the paradox of thrift).
Quote from: DGuller on March 30, 2010, 09:30:04 AM
Why are you emphasizing "to China"? Did you miss the point that AR was making that China's currency manipulation makes the dollar too expensive in general, and not just in relation to China? It's stated in the quote to which you replied.
I am emphasizing "to China" because the yuan-dollar exchange rate is what we are discussing. What AR wants to allege about the impact of the Chinese keeping the yuan too cheap on the dollar's value in general is not what is at stake, nor is it what the US government is alleging.
Quote from: The Minsky Moment on March 30, 2010, 12:54:12 PM
I saw that point too, but not an explantion for it. To the extent other currency pairs trade relatively freely, I don't quite get how China can manipulate those rates by setting a dollar target.
If the relationship between the US dollar, Yuan, and Pound is 1, 7, and 2 respectively, and the Chinese wish to intervene to devalue the Yuan so that there are 8 yuan to the dollar, that is going to affect the strength of the pound. I guess in theory the relationship could become 1, 8, 2 and the devaluation be equal against the pound and dollar, but do you think if the Chinese were to dump $2 trillion in US dollars tomorrow the exchange rate between pound and dollar would be unaffected?
Quote from: alfred russel on March 30, 2010, 10:02:22 AM
It isn't a non sequitor--in the Great Depression, going into the depression, tariffs rose, which typically might be inflationary, but there was actually severe deflation. Why? In large part because of a severe output gap, which is disinflationary. When lots of people are out of work, there is a downward pressure on wages, and when there is reduced demand for products and services pricing becomes increasingly competitive.
I don't see what this has to do with the yuan being too cheap. The US isn't trying to compete with Chinese labor. Lack of US jobs isn't coming from importing too much Chinese underwear in preference to our own.
QuoteToday we have unemployment of close to 10%--another large output gap. Inflation is expected to be very low this year, even though the dollar has depreciated significantly off of last year's highs. I question whether another 20% depreciation would really be inflationary in this environment.
The US could take action to deflate its currency, without doing anything like tariffs on Chinese goods. The fact that the US government is not acting to do so implies to me that they don't think that the problem is that the US dollar is too strong overall. The complaint is, instead, (as the OP says), that "China is unfairly manipulating its currency against the dollar to promote its exports."
Quote from: The Minsky Moment on March 30, 2010, 12:54:12 PM
I saw that point too, but not an explantion for it. To the extent other currency pairs trade relatively freely, I don't quite get how China can manipulate those rates by setting a dollar target.
I don't think that the Chinese are doing this through currency trading
per se, but by setting prices such that they give more of their currency for US bonds.
How freely is the yuan traded?
Quote from: grumbler on March 30, 2010, 02:40:05 PM
I am emphasizing "to China" because the yuan-dollar exchange rate is what we are discussing. What AR wants to allege about the impact of the Chinese keeping the yuan too cheap on the dollar's value in general is not what is at stake, nor is it what the US government is alleging.
In that case you should challenge that assertion directly. What you did is quote it, not address it, and then make a statement that could possibly be valid only if the assertion were false.
Quote from: grumbler on March 30, 2010, 02:45:46 PM
Quote from: alfred russel on March 30, 2010, 10:02:22 AM
It isn't a non sequitor--in the Great Depression, going into the depression, tariffs rose, which typically might be inflationary, but there was actually severe deflation. Why? In large part because of a severe output gap, which is disinflationary. When lots of people are out of work, there is a downward pressure on wages, and when there is reduced demand for products and services pricing becomes increasingly competitive.
I don't see what this has to do with the yuan being too cheap. The US isn't trying to compete with Chinese labor. Lack of US jobs isn't coming from importing too much Chinese underwear in preference to our own.
QuoteToday we have unemployment of close to 10%--another large output gap. Inflation is expected to be very low this year, even though the dollar has depreciated significantly off of last year's highs. I question whether another 20% depreciation would really be inflationary in this environment.
The US could take action to deflate its currency, without doing anything like tariffs on Chinese goods. The fact that the US government is not acting to do so implies to me that they don't think that the problem is that the US dollar is too strong overall. The complaint is, instead, (as the OP says), that "China is unfairly manipulating its currency against the dollar to promote its exports."
We obviously don't want to deflate right now--deflation is bad. What we would like is for a more favorable exchange rate, which is why we are talking about the Chinese manipulating the exchange rate, which is keeping the dollar artificially strong.
We aren't going to impose retaliatory tariffs, because a trade war would be worse than an overvalued dollar.
Quote from: alfred russel on March 30, 2010, 02:30:33 PM
The artificial capital account surplus that the Chinese are exporting means that effectively the Chinese are exporting artificial savings to the US economy. The increase in savings during an economic downturn results in a reduction of aggregate demand (see the paradox of thrift).
A capital account surplus means that the US financing the current account by surrendering claims on US assets. From a domestic US standpoint - this is an act of dissaving, not saving. It is the Chinese that are increasing their stock of savings by acquiring US capital assets in exchange for goods for current consumption.
QuoteIf the relationship between the US dollar, Yuan, and Pound is 1, 7, and 2 respectively, and the Chinese wish to intervene to devalue the Yuan so that there are 8 yuan to the dollar, that is going to affect the strength of the pound. I guess in theory the relationship could become 1, 8, 2 and the devaluation be equal against the pound and dollar, but do you think if the Chinese were to dump $2 trillion in US dollars tomorrow the exchange rate between pound and dollar would be unaffected?
In the typical case, the market is going to set the dollar-sterling rate and the Chinese effectively peg to both by choosing the dollar peg. And this indeed is a deliberate side effect of Chinese currency policy - they want to stay low vs. the euro and sterling as well as the dollar.
I agree with you that extreme interventions could so overwhelm the currency market that the other dollar pairs could be affected.
Quote from: grumbler on March 30, 2010, 07:59:59 AM
Which helps the US consumer and harms the Chinese consumer, without harming the US producer. Seems like something I want to keep up.
That makes sense, but only to the extent that the US can continue to finance its current account deficit without creating other disruptions.
Quote from: The Minsky Moment on March 30, 2010, 02:54:29 PM
A capital account surplus means that the US financing the current account by surrendering claims on US assets. From a domestic US standpoint - this is an act of dissaving, not saving. It is the Chinese that are increasing their stock of savings by acquiring US capital assets in exchange for goods for current consumption.
From a combined China-US perspective, it is an act of artificial saving. It makes us all worse off, and subsidizes the production of US goods in China (at a time US production is below optimal).
Quote from: The Minsky Moment on March 30, 2010, 02:54:29 PM
In the typical case, the market is going to set the dollar-sterling rate and the Chinese effectively peg to both by choosing the dollar peg. And this indeed is a deliberate side effect of Chinese currency policy - they want to stay low vs. the euro and sterling as well as the dollar.
They have acquired vast reserves of dollars to keep the dollar artificially high against their currency. I just disagree that isn't going to have an effect on other currencies. If they announced that they were going to unwind their US reserves at the same rate they built them up the past couple of years, I have to imagine that would hurt the dollar against a broad basket of currencies. Don't you think that would hurt other pairs? And if so, why are you sure that taking them in hasn't affected those pairs as well?
Quote from: alfred russel on March 30, 2010, 03:12:57 PM
Quote from: The Minsky Moment on March 30, 2010, 02:54:29 PM
A capital account surplus means that the US financing the current account by surrendering claims on US assets. From a domestic US standpoint - this is an act of dissaving, not saving. It is the Chinese that are increasing their stock of savings by acquiring US capital assets in exchange for goods for current consumption.
From a combined China-US perspective, it is an act of artificial saving. It makes us all worse off, and subsidizes the production of US goods in China (at a time US production is below optimal).
That is so, but only because China sterilizes the capital inflow. This is a crucial point that is often missed.
Absent sterlization, the massive capital inflow would vastly increase the Chinese monetary base, stimulating domestic demand and inflation. That would effectively force China's hand and allow the currency to rise to offset the inflationary effect. By sterilizing the inflow, the Chinese simultaneously keep inflation at bay, suppress domestic Chinese demand, and allow themselves to maintain the peg. But the net effect internationally - as you point out - is to drain demand out of the world economy and export deflation.
What China is doing is not unlike French policy in the runup to and early stages of the Great Depression - the Bank of France try to stockpile masses of gold reserves by sterilizing the inflow and keeping the franc artificially low. China already accounts for a greater percentage of world GDP then France did then, and continues to grow rapidly as against the RotW.
Quote from: The Minsky Moment on March 30, 2010, 03:33:34 PM
That is so, but only because China sterilizes the capital inflow. This is a crucial point that is often missed.
Absent sterlization, the massive capital inflow would vastly increase the Chinese monetary base, stimulating domestic demand and inflation. That would effectively force China's hand and allow the currency to rise to offset the inflationary effect. By sterilizing the inflow, the Chinese simultaneously keep inflation at bay, suppress domestic Chinese demand, and allow themselves to maintain the peg. But the net effect internationally - as you point out - is to drain demand out of the world economy and export deflation.
And since we don't need deflation right now, and we do need demand, it comes back to the original point--the Chinese are screwing us. There isn't anything we can do about it, so I'm going to be nice to Mono so I'll have a guy on the inside when they take over the world.
Quote from: The Minsky Moment on March 30, 2010, 02:57:29 PM
That makes sense, but only to the extent that the US can continue to finance its current account deficit without creating other disruptions.
This is true, but it is not due to China's actions that the US has a current account deficit. It is because the US has to import oil at such a prodigious rate. China's actions are harming China (and other low-wage countries even more) than they are the US.
Quote from: grumbler on March 31, 2010, 09:11:31 AM
Quote from: The Minsky Moment on March 30, 2010, 02:57:29 PM
That makes sense, but only to the extent that the US can continue to finance its current account deficit without creating other disruptions.
This is true, but it is not due to China's actions that the US has a current account deficit. It is because the US has to import oil at such a prodigious rate. China's actions are harming China (and other low-wage countries even more) than they are the US.
In 2008, total petroleum product imports by the US were $453 billion and total petro product exports were $67 billion for a deficit of $386 billion. This is a very substantial figure but still less than the total deficit of $695 billion in trade in goods and services.
For 2009, the equivalent figures are $204 billion (reflecting lower oil prices and the effects of the recession of consumption) out of a total deficit of $380 billion.
Thus, the US petroleum habit is indeed a significant cause, accounting for more than half of the yearly deficit, but there are other contributors as well. For example, in 2008, the US suffered a net deficit of over $320 billion in the consumer good trade; in 2009, the figure is over $200 billion - i.e more than the petroleum associated deficit.* Chinese trade is the most significant part of this deficit (although not the sole cause).
Even at the reduced level of *only* $15-20 billion in net consumer goods imports, there is a significant financing burden on the US. And since in the short run there is little the US can do to reduce its petro imports or affect the price of oil, the consumer goods trade is a natural point of focus.
*One often hears ganshing of teeth about the decline in the US "industrial base" and claims that the US "does not make anything" anymore. The data does not bear this out - the US actually runs a trade surplus in non-automotive capital goods, including a slight surplus in industrial machinery.
Quote from: The Minsky Moment on March 31, 2010, 10:07:43 AM
*One often hears ganshing of teeth about the decline in the US "industrial base" and claims that the US "does not make anything" anymore. The data does not bear this out - the US actually runs a trade surplus in non-automotive capital goods, including a slight surplus in nonagricultural machinery.
I think we have the world's largest manufacturing sector, but I could be wrong.
Quote from: alfred russel on March 31, 2010, 10:11:44 AMI think we have the world's largest manufacturing sector, but I could be wrong.
The US economy is three times the size of Japan and four times the size of China or Germany, so it would be extremely surprising it it wasn't the largest manufacturer in the world. And probably the largest in every other sector as well, even in mining or tourism or whatever.
Quote from: grumbler on March 31, 2010, 09:11:31 AM
China's actions are harming China (and other low-wage countries even more) than they are the US.
But China's actions, by harming China (or to be more precise Chinese consumers) do harm the US and the rest of the world. The problem is not that we are importing too much from China; it is that China is not importing enough from us. Were the Chinese economy to be more balanced (and were Chinese policies not biased against US export strengths in services) this problem could be partially remedied.
Quote from: Zanza on March 31, 2010, 10:21:01 AM
Quote from: alfred russel on March 31, 2010, 10:11:44 AMI think we have the world's largest manufacturing sector, but I could be wrong.
The US economy is three times the size of Japan and four times the size of China or Germany, so it would be extremely surprising it it wasn't the largest manufacturer in the world. And probably the largest in every other sector as well, even in mining or tourism or whatever.
We are awesome. But I think China is closer to us than that once you back out the currency issues.
Quote from: The Minsky Moment on March 31, 2010, 10:23:03 AM
Were the Chinese economy to be more balanced (and were Chinese policies not biased against US export strengths in services) this problem could be partially remedied.
See, that is a legit thing to fight a trade war over; I have always agreed with Adam Smith on the value of retaliatory tariffs. This "wah, wah, the Chinese government is buying US treasury bills and depressing the value of their currency compared to ours" bleat is not.
If it came down to a real war, the Chinese would blow themselves up: http://news.bbc.co.uk/2/hi/asia-pacific/8597300.stm