The U.S. and China Should Trade Economic Policies

U.S.-China Economic and Security Review Commission held hearings on what is happening in China at the moment. The testimony at the hearings confirmed exactly what I have been writing. A quote from Gordon C. Chang, author of The Coming Collapse of China summed it up concisely: "China has the world's fastest slowing economy."

China may have the world's "fastest slowing economy" as a result of excess savings, but the United States has the world's fastest rising debt as a result of excess spending. Both countries' governments are following the foolish policies that I predicted would turn the recession into a depression:

Chinese policy makers have adopted the rule-of-thumb that weakening their currency increases demand for their products. This rule has worked in the past. They just haven’t realized that the situation has changed because they’ve bankrupted their customers. (Mercantilism has the flaw that it destroys the markets for its products.)

American policy makers have adopted the rule-of-thumb that you fight recessions by increasing government budget deficits. It’s worked in the past. They just haven’t realized that they are in a world-wide depression caused by mercantilism in which budget deficits increase trade deficits so much that they are ineffective.

Ironically, each country would get out of the world-wide recession if it simply adopted the other country's rule-of-thumb. If the Chinese government started borrowing like mad while greatly increasing available credit in order to stimulate its people's consumption, they would reduce their excess savings and get out of the recession. If the American government started cheating on trade through export subsidies and currency manipulations, demand for American products would increase and American debt could be reduced. In fact, balanced trade would actually get us out of the recession with no need for a stimulus package.

There is actually a very simple solution to the world's economic problems. The United States and China simply have to trade economic advisers!

Comments

[kelm:]

China has been massively easing credit for some months and new loans have been shooting up - not sure why you're stating they haven't. The concern going forward is of inflation getting ignited by the easy money policy in Beijing. Anecdotal evidence in fact indicates that some of the new loans, which are supposed to be going towards economic expansion, are winding up getting invested in Shanghai shares.

Mar 02 09:21 AM

[Blackstone:]

The irony is that we might actually be going in that direction. Geithner has about as much idea of what he's doing as a 2 year-old running a computer. I foresee that when our debt exceeds our ability to pay, China will begin to borrow more money in order to help out their domestic economy. The status quo cannot stay as is much longer; it's like two cars playing chicken, somebody is going to have to pull off.

!Blackstone!

Mar 02 09:30 AM

[blinded1:]

If Gordon Chang's prediction in any way close to reality, China should have been no longer existing. I'm sure we wll see moer such craps as these guys are sinking.

Mar 02 10:02 AM

[blinded1:]

If Gordon Chang's prediction in any way close to reality, China should have no longer been existing. I'm sure we will see more such craps as these guys are sinking.

Mar 02 10:05 AM

[Dirk McCoy:]

The US can export food, timber, airplanes, US vacation property, movies, television shows, books, software, cars, and teachers. The problem isn't what we can export, the problem is building trust that they can consume without setting up an unsustainable economy that will run out of water, land, energy, food, etc.

This is an economic crisis of confidence that can only be solved by leadership that can show a vision of a future where cheap solar energy empowers massive infrastructural modification of agriculture and water supplies.

Mar 02 11:43 AM

[Billy Gee:]

Thank you Mr. Richman for trying to find some solutions to our bizarre trade relationship with China. There are some pitiful folks that insist that are problem is we have nothing to export to China or if we would only release highest security tech then we could export something. The fact of the matter is we have many things that could be exported and that is a big reason why joint ventures of U.S. manufacturing firms as well as our high tech firms as so popular in China. This is a conduit for transferring expertise and trade secrets to Chinese firms.

Your article highlights The U.S. - China Economic and Security Review Commission. Readers should go their 2008 Report to Congress and see the discouraging analysis of China's trade practice with the U.S. The sight is: www.uscc.gov/annual_re...

Mar 02 11:47 AM

[huangthomas:]

Foreign exchange reserve, current account balance, and national budget are three different things. China has close to $2 trillion foreign exchange reserve, but in national budget, China is already in deficit spending mode, although it is small in relation to GDP. The government will borrow more as the second stimulus package is revealed. China does not depend foreigners to buy their national bonds because Chinese save a lot. During Chinese New Year period, they save 50% of their income. There goes Chinese domestic consumption!

Mar 02 11:49 AM

[Mad Hedge F...:]

Interesting article! If the Chinese think they are going to get 8% growth in 2009, then they are smoking their former largest import, Opium. I think they are totally unaware of the ton of bricks that is about to land on them in the form of the extinct American consumer. China has spent 30 years building a giant export machine, for which there are currently no buyers. Take a look at Japan’s statistics, which are far more reliable than China’s, which show exports falling off a cliff, machine tool orders evaporating, and once a half century losses for leading exporters like Toyota. These are numbers far worse than we saw during the depths of their lost decade. Of course, China has the money, and certainly the need, for a massive domestic infrastructure build out that can offset the disappearing exports. But this is not an economy that can exactly turn on a dime, and the transition will be painful. China can always report 8% GDP growth this year. Another problem is that modern China has never faced a recession, and defensive business strategies are essentially unknown. One of the advantages of a centrally planned totalitarian economy is that if you don’t like the economic numbers you are getting, just make up some better ones. Personally, I think 5% growth is more realistic, but then you have always known me as a shrinking, subdued, conservative kind of guy. If I wanted headlines I would be shouting 2% growth, or perish the thought, negative growth, from the rooftops, as some China watchers are. The implications for the global economy are huge.

Mar 02 11:51 AM

[fireball:]

your picture of china is brighter than the one i see from reading.
the state has in the past ordered many bad loans be given to businesses that are not going to make it and have no hope of repaying the loan.
roughly a month back they ordered business to halt the lay-offs. it looks like they may be in a deeper mess than we are.
their advantage is in a disarmed population that can only dissent until the govt. opts for slaughter.
their business loans smell a lot like our bad home loans at least partially.
this is speculation as i trust their govt. figures about as much as i trust ours.

Mar 02 12:31 PM

[huangthomas:]

I agree it is very difficult to have 8% GDP growth rate. Most foreign institutions predict a growth rate of 6%. I believe it will take a large second stimulus package to achieve 6%.

It is important to understand Chinese politics and culture. Annual growth rate of 8% is a national policy decided several years ago in Beijing to lift Chinese countryside out of poverty. All Chinese officials will tell you 8%, because it is a national policy. All parrots in China are singing "baoba, baoba....". It means "protect 8" or "achieve 8". When the policy was set, no one foresaw the current financial crisis. Remember China put out the first stimulus package last November when they realized the seriousness of the contraction of export and associated massive layoff of migrant workers. Twenty-five million (19%) out of 130 million of migrant workers lost their jobs. The second stimulus package is in the working. The size could be twice as large as the first one from 4 to 8 or 10 trillion Yuan). I believe 6.5% is within "achievable" range, but unemployment rate of migrant workers is not readily amenable to massive stimulus package.

The communist culture is to project a "macho, macho" and "invincible" character to the world. They may not be willing to admit publicly certain weakness in economy. They are not fool not to deal with it.

Mar 02 12:59 PM

[Howard Richman:]

jrhc points out that I was ignoring the "toxic derivatives that poisoned the finances worldwide" when I commented that Chinese mercantilism bankrupted its U.S. customers.

Let me explain. The mercantilist strategy is to maximize exports and minimize imports. (For example, China buys 1/4 from us of what we buy from them.) We borrow from them to buy their exports. From 1998 until house prices peaked in 2006, American consumers borrowed on their homes to buy Chinese exports. When the house price bubble collapsed, the banks got caught with much of the debt.

If the mercantilists bought as much from us as we bought from them, we would not need to borrow from them in order to buy their exports. We would get income from our exports and would use that income to buy their exports.

Howard Richman
tradeandtaxes.blogspot...

Mar 02 04:34 PM

[Howard Richman:]

jrhc points out that I was ignoring the "toxic derivatives that poisoned the finances worldwide" when I commented that Chinese mercantilism bankrupted its U.S. customers.

Let me explain. The mercantilist strategy is to maximize exports and minimize imports. (For example, China buys 1/4 from us of what we buy from them.) We borrow from them to buy their exports. From 1998 until house prices peaked in 2006, American consumers borrowed on their homes to buy Chinese exports. When the house price bubble collapsed, the banks got caught with much of the debt.

If the mercantilists bought as much from us as we bought from them, we would not need to borrow from them in order to buy their exports. We would get income from our exports and would use that income to buy their exports.

Howard Richman
tradeandtaxes.blogspot...

Mar 02 04:35 PM

[Howard Richman:]

jrhc points out that I was ignoring the "toxic derivatives that poisoned the finances worldwide" when I commented that Chinese mercantilism bankrupted its U.S. customers.

Let me explain. The mercantilist strategy is to maximize exports and minimize imports. (For example, China buys 1/4 from us of what we buy from them.) We borrow from them to buy their exports. From 1998 until house prices peaked in 2006, American consumers borrowed on their homes to buy Chinese exports. When the house price bubble collapsed, the banks got caught with much of the debt.

If the mercantilists bought as much from us as we bought from them, we would not need to borrow from them in order to buy their exports. We would get income from our exports and would use that income to buy their exports.

Howard Richman
tradeandtaxes.blogspot...

Mar 02 04:35 PM

[Howard Richman:]

jrhc points out that I was ignoring the "toxic derivatives that poisoned the finances worldwide" when I commented that Chinese mercantilism bankrupted its U.S. customers.

Let me explain. The mercantilist strategy is to maximize exports and minimize imports. (For example, China buys 1/4 from us of what we buy from them.) We borrow from them to buy their exports. From 1998 until house prices peaked in 2006, American consumers borrowed on their homes to buy Chinese exports. When the house price bubble collapsed, the banks got caught with much of the debt.

If the mercantilists bought as much from us as we bought from them, we would not need to borrow from them in order to buy their exports. We would get income from our exports and would use that income to buy their exports.

Howard Richman
tradeandtaxes.blogspot...

Mar 02 04:37 PM

[Howard Richman:]

jrhc points out that I was ignoring the "toxic derivatives that poisoned the finances worldwide" when I commented that Chinese mercantilism bankrupted its U.S. customers.

Let me explain. The mercantilist strategy is to maximize exports and minimize imports. (For example, China buys 1/4 from us of what we buy from them.) We borrow from them to buy their exports. From 1998 until house prices peaked in 2006, American consumers borrowed on their homes to buy Chinese exports. When the house price bubble collapsed, the banks got caught with much of the debt.

If the mercantilists bought as much from us as we bought from them, we would not need to borrow from them in order to buy their exports. We would get income from our exports and would use that income to buy their exports.

Howard Richman
tradeandtaxes.blogspot...

Mar 02 04:37 PM

[Howard Richman:]

jrhc points out that I was ignoring the "toxic derivatives that poisoned the finances worldwide" when I commented that Chinese mercantilism bankrupted its U.S. customers.

Let me explain. The mercantilist strategy is to maximize exports and minimize imports. (For example, China buys 1/4 from us of what we buy from them.) We borrow from them to buy their exports. From 1998 until house prices peaked in 2006, American consumers borrowed on their homes to buy Chinese exports. When the house price bubble collapsed, the banks got caught with much of the debt.

If the mercantilists bought as much from us as we bought from them, we would not need to borrow from them in order to buy their exports. We would get income from our exports and would use that income to buy their exports.

Howard Richman
tradeandtaxes.blogspot...

Mar 02 04:37 PM

[Howard Richman:]

Dave Wrixon,

Peking University professor Michael Pettis is a pretty good source for info about China's half-hearted stimulus which largely consists of currency manipulations and export subsidies. See:

tradeandtaxes.blogspot...

Howard Richman

Mar 02 04:42 PM

[Howard Richman:]

Huangthomas,

Thank you for confirming my point that the Chinese stimulus plan is actually small relative to their GDP. You are correct that the next installment of their stimulus plan could be larger..

You point out, correctly, that China's savings rate is about 50% of GDP. That compares to a report today that US household savings in January was unusually high at 5% of income after taxes. The high Chinese savings rate is precisely the problem that their massive stimulus plan can address through massive money supply expansion.

You mention that the Chinese government is worried about inflation. They shouldn't be. Inflation is precisely the recipe if a government is serious about reducing its people's saviings rate. Inflation gets people to stop hoarding cash and start buying assets.

If we sent our advisors to China., they'd soon get inflation going. They're about to demonstrate their skill in that area here in the United States!.

Howard Richman
tradeandtaxes.blogspot...

Mar 02 04:59 PM

[Howard Richman:]

MadhedgefundTrader,

I laughed aloud as I read your humorous, but correct comments. I especially loved this one: "One of the advantages of a centrally planned totalitarian economy is that if you don’t like the economic numbers you are getting, just make up some better ones."

You went on to note that "5% growth is more realistic". You should check out those hearings that I cited in this commentary. I think 5% is actually way high. The people testifying at the hearing were claiming that China's growth rate was negative in January. I had a commentary about this a month ago. It was entitled, "China's in a Recession; The IMF is in a Dreamworld":

seekingalpha.com/artic...

Howard Richman

Mar 02 05:06 PM

[Amitabha Mu...:]

China has a long way to go to decouple their economy from that of American economy. Their entire economic prosperity came from exploitation of labor with minimum wage and thus exporting cheap products to America and other countries. I really do not understand why everybody gives too much attention to China's success story and ignore the cost. This is a country that forcibly perished half of its young male population for building the Chinese Wall.
Now since America is down and no longer in a capacity to buy even cheap Chinese made goods the Chinese economy is doomed. It is not technically possible unlike India to increase domestic consumption to a very high level so that export to America can be ignored.

Mar 03 12:04 AM