A Wall St. Economist on the U.S. and China

How might markets and economies unfold from here? Probably one of the better persons to ask this question is Robert Barbera, a noted Wall Street economist who has been following economic trends for over 25 years. He is also a professor at Johns Hopkins University and author of a recent book, “The Cost of Capitalism: Understanding Market Mayhem and Stabilizing Our Economic Future” (McGraw-Hill Publishers, February, 2009).

I will be reviewing that book shortly but first, Mr. Barbera’s (paraphrased) answers to some questions I recently asked him.

Q) In your book, you say the big monetary ease in 2001-2003 played a role in the formation of the housing bubble. Will the big easing in monetary policy in 2009 lead to another bubble?

A) First, we have to get through a difficult period and produce a recovery in the economy. After that happens, the Federal Reserve will need to rein in liquidity to keep inflation from becoming a problem. Then the risk remains of creating another bubble like the ones seen over the past ten years. This time, though, I don’t see it happening because I believe central bankers have learned from the financial crisis that they need to conduct monetary policy with an eye on more than just wage and price changes. They’ll also be looking at leaning against excessive risk taking and rising asset prices before they get too far out of line.

Q) In your book, you say the Savings and Loan crisis of the late 1980s and the recession of 1990-91 coincided with the beginning of Japan’s descent. Is China’s investment boom and “heady rates of growth” similarly at risk now that they can’t rely as much on exporting to U.S. and other developed countries?

A) China is definitely feeling the pinch. I was in Hong Kong recently and people there were remarking on how the air was so clean these days. It appears that the factories nearby in China had curtailed production substantially. But the drop-off in exports has led to the Chinese authorities launching a huge fiscal stimulus to build infrastructure and keep the economy running. They appear to be in the midst of replacing export-led growth with consumer-driven growth.

Q) If China is replacing export-led growth with domestic-sourced growth, could this mean U.S. interest rates might ratchet upwards since China won’t have as great a need to peg its currency and thus won’t be buying U.S. dollars as much as before and parking them in U.S. treasuries?

A) I see domestic stimulus by China and other emerging countries as a good thing. For thirty years, the U.S bailed out the world economy by easing its fiscal and monetary policies in response to downturns, which stimulated exports from Asia and elsewhere. We can’t do this again because it will worsen already tenuous structural imbalances. Asia and other emerging countries have to engineer their own growth. China’s fiscal stimulus will help the global economy recover in a way that should reduce structural imbalances such as chronic trade deficits and surpluses. China may buy fewer U.S. treasuries but other buyers will emerge – just the mix of owners will change.

Comments

[Dean M:]

Everyone and his brother has made the same observation about how loose monetary policy led to the housing bubble. I don't remember all these geniuses speaking up before the crap hit the fan.

May 16 05:29 PM

[Dave Wrixon:]

Gravy train to continue as usual without China? Dream on!

May 16 06:04 PM

[AJB7:]

Economist Robert Barbera noted <China may buy fewer U.S. treasuries but other buyers will emerge – just the mix of owners will change.>

Any thought on who these "other buyers" might be; that is, when they "emerge"?

May 16 08:29 PM

[Longviewer:]

I've seen some interesting takes on China of late, but two stand out to illustrate economic versus political analyses of the Sino-American relationship to date. An economic shot at the title is Prof. Dani Rodrik's latest China piece at TPMCafe which recommends that China directly subsidize its manufacture of tradables while removing its controls on the value of the Yuan as a means of stimulating domestic consumption. I'm wondering what tradables he's referring to...which products? One commenter there asks.

The other piece is at Analystblues, www.analystblues.com and it questions the lack of level playing field leading to today's imbalances between China's regime centered economy and the US's relatively free market economy (less so every year). Specifically:

analystbluepapers.squa...

When we discuss debt, perhaps we are failing to see China's role in the US economy in recent years as a repayment for decades of US accommodations, concessions, permissive engagement, etc. and not as a set of investments or loans the US should be responsible for repaying now that it has stretched itself out over the world to play security specialist for world powers who have benefitted from it, but have not shared the bill.

May 17 12:37 AM

[Truyen:]

The stimulus package is proving to be effective in the short-term. The same situation is happening in its neighboring country, Vietnam.

On May 17 12:37 AM Longviewer wrote:

> I've seen some interesting takes on China of late, but two stand
> out to illustrate economic versus political analyses of the Sino-American
> relationship to date. An economic shot at the title is Prof. Dani
> Rodrik's latest China piece at TPMCafe which recommends that China
> directly subsidize its manufacture of tradables while removing its
> controls on the value of the Yuan as a means of stimulating domestic
> consumption. I'm wondering what tradables he's referring to...which
> products? One commenter there asks.
>
> The other piece is at Analystblues, www.analystblues.com and
> it questions the lack of level playing field leading to today's imbalances
> between China's regime centered economy and the US's relatively free
> market economy (less so every year). Specifically:
>
> analystbluepapers.squa...
>
>
> When we discuss debt, perhaps we are failing to see China's role
> in the US economy in recent years as a repayment for decades of US
> accommodations, concessions, permissive engagement, etc. and not
> as a set of investments or loans the US should be responsible for
> repaying now that it has stretched itself out over the world to play
> security specialist for world powers who have benefitted from it,
> but have not shared the bill.

May 17 09:21 AM

[coreopsis:]

Robt Barbera -- noted Wall Street economist? Never heard of him and I worked on the Street.

When I read <<For thirty years, the U.S bailed out the world economy by easing its fiscal and monetary policies in response to downturns>>, I understand why he's invisible. No sovereign nation does anything except in its self-interest. Any 'expert' claiming magnanimity for US policy is engaging in polemic, not analysis.

May 17 10:10 AM

[Ferdinand E...:]

Whatever is necessary to keep the Chinese economy afloat, the Chinese government will do. There is no room for sentimentality in Beijing. The only thing that can stop them is a shortage of natural resources.

May 17 10:21 AM