Reminder: There's a Solution to the Crisis and It Lies in China 13 comments
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Last November, Francesco Sisci and I wrote in Asia TImes Online:
Recovery requires a great change in direction of capital flows. For the past decade, poor people in the developing world have financed the consumption of rich people in America. America has borrowed nearly $1 trillion a year, mostly from the developing world, and used these funds to import consumer goods and buy homes at low interest rates. The result is a solvency crisis of the American household, which shows up as a solvency crisis for financial institutions. If we reckon the retirement needs of households as a liability, the household sector is as good as bankrupt.
No recovery is possible unless American households can save, and they cannot save in an economic contraction when incomes spiral downwards. To save, Americans must sell goods and services to someone else, and a glance at the globe makes clear who that must be: nearly half the world’s population, and most of the world’s capacity for economic growth, is concentrated in China and the Pacific Littoral.
We recommended a firm link between the US dollar and the Chinese yuan, in which the yuan would have full convertibility, with a solemn commitment by the two countries to maintain a fixed exchange rate forever. That would instantly link the two countries’ capital markets.
The demographic problem that creates a Japan-style deflationary bias in the US would disappear, because the demographics of China would be open to the American capital market. A great deal of work (bank branches, credit bureaus, and so forth) would be required to build the necessary infrastructure, to be sure, but linking the two currencies would make the rest of the solution possible.
In effect, the world’s two largest economies would establish a full partnership. As we wrote:
China’s economic problem is the inverse of America’s: China has achieved fast rates of growth at the expense of huge disparities between the prosperous coast and the backward interior, as well as excessive dependence on foreign markets. China’s policy response to the economic crisis is far more radical than Washington’s. Rather than attempting to patch up the situation and restore the status quo ante, China plans to spend nearly a fifth of its gross domestic product on an internal stimulus focused on infrastructure in its interior. Severe execution risk attends the Chinese proposal, and markets remain to be convinced.
China can reduce the execution risk of its great economic shift towards home consumption, and America can solve its savings problem, through a grand partnership. This partnership need not be exclusive to America and China, but it must be founded on America and China, two of the world’s largest economies. India and the other Asian economies should be encouraged to join this partnership. A great deal has been written about prospective conflict between China and the United States, but very little explanation is offered as to what issues might arise between China and the United States. China and America have far more to gain from cooperation than from conflict.
The trouble is that Americans can’t spend. They have to save. The combination of a catastrophic decline in wealth and a sudden bulge in retirements gives America the profile of Japan during the lost decade of the 1990s. The Keynesian approach is a one-country model, which states that if the population wants to save rather than spend, the government should spend for them. America appears to be getting away with this because the dollar is a reserve currency and the world has to hold dollars — but the grumbling overseas might lead to the rest of the world ditching the dollar eventually, making the US like like Britain in the 1960s and 1970s.
The Keynesian stimulus isn’t working very well, as the miserable employment data tells us, and the stock market clearly doesn’t believe Obama’s demurral that it will work later in the year. There’s already talk about another stimulus package. FInanced by whom, and how? The deficit is already approaching $2 trillion.
If we follow Robert Mundell and throw out the single-country model of the Keynesians, it is obvious that Americans can save in another fashion, that is, by exporting. China’s underdeveloped interior is potentially the world’s biggest export market, flanked by similar markts in Asia and elsewhere in the developing world. The transition would still be painful, and the frictions considerable, but America could reorient itself to th global market. There would be a recovery. As matters stand we face a lost decade.
Instead of grandstanding in Ghana–however meritorious it is to help the Africans with their problems–Obama should go to Beijing and have a serious conversation with his Chinese counterpart about how the world’s two largest economies can create a recovery.
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This article has 13 comments:
September 1992 anyone? And that was a linkage between much more economically integrated countries at similar stages in development...
This IS an attempt to patch up the situation:
a) a medium-term fiscal stimulus &
b) an attempt to reduce social tensions due to income inequality
It leaves other serious structural problems.
"If we follow Robert Mundell and throw out the single-country model of the Keynesians, it is obvious that Americans can save in another fashion, that is, by exporting."
If we remember our national accounts, (X - M) = T - G + (S - I)
ie net exports (X-M) = government sector saving (T-G)
+ private sector saving minus investment (S-I)
This is derived from accounting identities. So to increase net exports, americans have to save more. Period.
How dumb does he think the Chinese are?
China has seen many countries' economies destroyed because of the link to the dollar. The only beneficiaries of currency pegs are Wall Street firms like Goldman Sachs which can exploit them.
Our manufacturing capacity is minimal and that too comes at very high costs compared to China and other far-east nations.
The world does not need many more air planes than the ones now on order for the next decade or longer. We have a lot of them parked in Mojave and the rest the world would prefer bargains.
Our financial geniuses have killed our reputation for ingenuity in financial engineering for the foreseeable future. We have no capital to invest in Foreign countries.
We have no oil or other natural resources to export. I can go on further, but...
Does the author or anyone else has an idea on what we could export to overcome the world's biggest and probably good manufacturers in the Far East, especially China.
I'm always amazed when people completely lacking in business experience set themselves up to be experts in economics. Please do yourself a favor, put your savings in a company that makes something and then [try to] export the goods. Then come back and report to us.
On Jul 13 10:51 AM onebir wrote:
> "Rather than attempting to patch up the situation and restore the
> status quo ante, China plans to spend nearly a fifth of its gross
> domestic product on an internal stimulus focused on infrastructure
> in its interior."
> This IS an attempt to patch up the situation:
> a) a medium-term fiscal stimulus &
> b) an attempt to reduce social tensions due to income inequality
>
> It leaves other serious structural problems.
>
> "If we follow Robert Mundell and throw out the single-country model
> of the Keynesians, it is obvious that Americans can save in another
> fashion, that is, by exporting."
> If we remember our national accounts, (X - M) = T - G + (S - I)
>
> ie net exports (X-M) = government sector saving (T-G)
> + private sector saving minus investment (S-I)
> This is derived from accounting identities. So to increase net exports,
> americans have to save more. Period.
On Jul 13 03:34 PM skwestorange wrote:
> The author forgets one vital thing which is: What does America have
> to export?
> Our manufacturing capacity is minimal and that too comes at very
> high costs compared to China and other far-east nations.
> The world does not need many more air planes than the ones now on
> order for the next decade or longer. We have a lot of them parked
> in Mojave and the rest the world would prefer bargains.
> Our financial geniuses have killed our reputation for ingenuity in
> financial engineering for the foreseeable future. We have no capital
> to invest in Foreign countries.
> We have no oil or other natural resources to export. I can go on
> further, but...
> Does the author or anyone else has an idea on what we could export
> to overcome the world's biggest and probably good manufacturers in
> the Far East, especially China.
www.frontlinethoughts....
Their economy is deeply dependent on exports yet the continually rising yen hurts their ability to sell abroad. Mauldin blames their strong currency on (1)reversed carry trade and (2)hammered Japanese corporations bringing yen home to pay for their domestic expenses.
I'm always amazed when people completely lacking in business experience set themselves up to be experts in economics. Please do yourself a favor, put your savings in a company that makes something and then [try to] export the goods. Then come back and report to us."
Exactly.
You have to be sh#ttin' me. IT's so simple, we just export our.........that's right, we have nothing affordable to export, and no new technology to export, and cheap labor.....oh, none of that......let's see, we could sell them the space shuttles, let them go cheap, two for.......
Inane is a good word, assinine too.