Firat Ünlü

Firat Ünlü
Contributor since: 2009
If facebook plays it wrong it might just become an address-book with little else use.
Another option: a virtual strike.
Agree with you on the government but a couple of points where I'd like to expand the debate as your stance seems too 'American' to me as it neglects factors Europeans would include. The amount of people jumping on the China bandwagon blindsightedly is frightening in a way and made me more cautious.
Isn't the European case that, yes, whilst high-speed rail is rarely economically viable it produces benefits for the country as a whole that go beyond the revenue stream? Spain's case might be interesting here. Another problem is that infrastructure once built is difficult to upgrade, hence it may make sense to 'build big' as any further extension comes with extra cost and problems not evident yet. Infrastructure is difficult to scale to exactly needed size and demand. Airport extensions anywhere in Europe take several years at best.
Another idea specific to China may be that they have one or maybe two decades of really cheap labour left; so why not use it now and get things done?
Any link on the Credit Suisse document?
"It order to tackle the non-existent deflation problem"
There is deflation in the one sector that is of importance to the FED - asset prices.
"but there are a number of security issues, like North Korea and Iran that may be easier to address if the two largest economies in the world cooperated."
China feels that by engaging with ASEAN the US is engaging in its sphere of influence and causing problems down the line. Hence cooperation on Iran and North Korea will be limited at best. The US has the nice option of confronting China via its vast array of neighbors whereas China cannot retaliate in similar fashion as the US is protected by two oceans and two friendly countries up north and down south. China is thus forced to knock the US somewhat via third states such as Iran. Anything that makes the Chinese feel like containment policy will have a negative effect elsewhere.
Don't you mean third? ;)
Well, one could make a very good case that Japan cannot fulfill its obligations either. The main reason they got away with deficit spending at such rates was their captive financial system. If the US did the same with its citizens people would be outraged all over the place.
In fact one could argue that Japan is facing more trouble than the US as Japanese people's pensions are tied up into JGB's. Unfortunately the Japanese government wasted their savings on unproductive measures that did not have an adequate rate of return.
As one commentator above suggested, if the US defaults foreigners are sc***** but if Japan defaults then the Japanese are sc****.
If you're making a profit but wasting the proceeds at the same you're not really saving.
It is hardly a huge challenge to find out which exact securities China holds, that side-issue is so small as to be considered irrelevant. Seriously.
China can trade US dollars it earns via trade to other economies but for the most part it seems content in racking up dollar-denominated assets, US Treasuries are just one part of those which is why it's pointless to look at solely these. For all the talk about moving into gold, compared to the bond market it is a miniscule market. If they want a substantial trade surplus with the US the only real market of sufficient size to re-invest those dollars is the Treasury market. Anything else is really too small. That's basic economics.
Don't delude yourself regarding China just because you're unhappy with US policy. Many people make the mistake of transfering their wish of US interest rising on to some third actor in vain hope. That's hardly mature.
China does not possess magical abilities no matter how many people wish it had these. Its actions are constrained by real economic forces.
I've laid out the argument in easy to understand terms, as it seems that you do not wish the follow the argument any further debate seems pointless and unproductive.
The point is that interest rates would not go up as the US could either declare them null and void (which is different from defaulting) or print (what some economists would even love to see). Secondly, whether or not interest rates rising would be a good thing for the economy is a totally different matter altogether as only few people would claim that China has the right to get the US back on the right track of fiscal discipline through 'the school of hard knocks'.
Believing that the US needs higher interest rates and hence declaring any outside intervention to achieve that outcome welcome is different from a deliberate ploy of trying to undermine US economic (and national) security. That's why it's called 'nuclear option' and not 'external stimulus'. The short-term consequences of such an action would either be cleaned up by the FED through printing (rendering the 'dump' useless) or by the US government declaring those bonds null and void (again rendering the 'dump' useless). The US migt declare the bonds null and void temporarily until tensions subside and the Chinese threat is revoked, taking some heat off the confrontation and gaining moral upper ground.
As far as protectionist measures are concerned, as a German I'm quite sick of others trying to excuse their way out of poor economic-policy by merely shifting the blame on exchange-rates. The Japanese are still reeling from the Plaza Accord when they gave in to US demands. I don't even need to mention agricultural subsidies in Europe and the US that have caused havoc in huge parts of the world.
Shall we really open that can of worms?
"They're led by former U.S. President Bill Clinton — now U.N. special envoy to Haiti — who publicly apologized this month for championing policies that destroyed Haiti's rice production. Clinton in the mid-1990s encouraged the impoverished country to dramatically cut tariffs on imported U.S. rice."
The only way the Chinese could conceivably make use of the 'nuclear option' would be in an environment of extreme geopolitical instability. You need to remind yourself of the serious consequences any such action would have on the economy. There is good reason to believe that a case of deliberate 'economic warfare' would be considered unlegitimized even outside the US. Yes, the Chinese would sell into the global market place but who would buy bonds that have been rendered null and void, without the promise of the USG to pay they are worthless.
The reason others would have little to nothing to fear is that they wouldn't be so stupid to engage in economic warfare in the first place. Do you seriously believe that the USG would just let itself be rolled over instead of taking decisive action?
America runs a trade deficit with 90+ nations, the yuan is just one piece of the puzzle.
As for currencies.
Care to draw any conclusion based on this data or are Germany and Japan supposed to have been undervalued all the time?
Many interesting points but I'd just like to mention that we could move from an agricultural society to an industrial one because the agricultural sector managed to increase production and feed the population just as well whereas in the move to the information age the domestic American industrial sector has failed to keep up with demand. Hence the comparison isn't quite the same.
The reason those countries are not joining in is that their currencies have actually FALLEN since 2008 compared to the $ and hence to the yuan which is pegged to the dollar.
I would love to see a coherent argument that deflation is 'bad' for the economy. The mere fact that people believe that rising house prices are 'good for the economy' sums it all up. We are in deflation now because we had been through an unsustainable credit boom for at least a decade. What is so difficult in grasping this concept?!
Of course you can prop up AD but eventually you run up against a brick wall.
As far as the so-called productivitiy boom is concerned, I'd love to see the data on it. My gut tells me that finance/RE were behind it.
It's difficult to make a conclusion about the success of either model when the US isn't even following its own.
From Wikipedia on the Washington Consensus
1. Fiscal policy discipline;
2. Redirection of public spending from subsidies ("especially indiscriminate subsidies") toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;
3. Tax reform – broadening the tax base and adopting moderate marginal tax rates;
4. Interest rates that are market determined and positive (but moderate) in real terms;
5. Competitive exchange rates;
6. Trade liberalization – liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;
7. Liberalization of inward foreign direct investment;
8. Privatization of state enterprises;
9. Deregulation – abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial institutions;
10. Legal security for property rights.
Now, if the US followed above prescription and still was in this quagmire a comparion might make sense, but with the US not following how can anyone say the US model failed?
Anyone's that ever been to South Korea or Japan would have understood from the beginning that China was never going to let foreigners take over key industrial sectors. I am baffled that people who invested billions failed to grasp this simple historical fact.
China is playing the game to its advantage - just like Chinese entrepreneurs within China use everything to tilt the playing field into their favour. This is competition on a scale that we're unaccustomed to hence all the fuss. Most foreigners get taken for a ride when trying to buy a pair of socks on the street, how are they supposed to run a business there?
As for mercantilism, take out the US and China's trade is more or less balanced. The US runs a trade deficit with almost every country. Consumption makes up 70% of GDP instead of the historical 64% and as long as financing is available imbalances are always going to occur.
As a thought experiment, imagine the US was no longer existent what do you think would happen to Chinese exporters? Would they go bankrupt or find other markets (like their home country?).
An American passport gives nobody the divine right of being consumer of last resort.
I've been reading your blog for a long time, love your postings and those have shaped my understanding of the world economy to some degree. It was great to find someone like-minded at a time when mainstream media had not even been talking about the problems of debt. Keep up the good work!
'Hand-over' refers to the fact that some people would love to see the RMB increase by a substantial amount far beyond its real-value in the false belief that this would correct trade-imbalances.
You do realize that at a time of increasingly scare resources it might turn out to have been somewhat mistaken to hand over substantially more purchasing power to 1.3bn people? I may be young but having read some literature on the usd/yen in the past the yen was supposedly undervalued by 40% almost all the time. Anyone see a pattern?
Once again economists prove why anybody with half a brain would be well-advised to stay clear from their advice. Unless people factor into debt which had been on an unsustainable run-up prior to the crisis all the time spent on the analysis might have been better used on a stag-do binge in Prague.
'Aggregate demand' had been artificially high for years because of debt increase, we can either accept this fact or play this game with a bigger balance sheet until even that one is ruined.
Truth be told, economists have not only messed up the third world for decades with their useless development models but are now also on the way to destroy what's left of wealth in the Western world. Way to go, way to go...
What a sad indictment of the economist's profession that someone needs to spell these ideas out.
That approach may be technically correct but it is utterly useless since it fails to mention where that demand us supposed to come from, increased unsustainable debt. When it comes to economics using a static methodology is mostly without sense as the crux of the matter usually lies with the dynamics and underlying fundamentals.
What's so difficult in realizing for once that debt can't grow larger than gdp for decades?
As for Ricardian Equivalence, personally I've run up some debt (rather than saved) as deflationary pressures will eventually lead to too loose monetary policy and irresponsible behaviour has so far been rewarded.
There must be a mistake with India, total debt and debt/gdp don't make sense. India's GDP is far from being close to 3tr.
I acutally think that moving past the lewis point is a good thing for China. It takes more than lower wages for factories and the like to move and it's far more likely that they'll first move within China (to the Western provinces), after all these factories are operated by Chinese businessmen so they're going to prefer to stay within China.
Rising wages also mean that finally purchasing power increases and thus less of a need for export surpluses exists.
Interesting paper for those who want to go more into depth.
What Does the Lewis Turning Point Mean for China?
A Computable General Equilibrium Analysis
[Abstract] We apply a computable general equilibrium framework to assess likely impacts of the Lewis turning point on China and the rest of the world. Modeling results suggest that China will probably transition from an abnormal economy to a normal economy with somewhat lower growth but higher inflation, which requires significant revision to the macroeconomic policy framework. China would lose competitiveness in labor-intensive activities, its current account surplus should fall but overinvestment risk could rise. These changes in China should help improve other counties' current accounts and boost low-cost countries' production. The Lewis turning point, however, does not provide automatic solutions to some of the key challenges, such as service sector development and innovation capability. China will need to make serious policy efforts to avoid the so-called 'middle income trap'.
Well, if they're European they can actually count themselves lucky to have missed most matches in this World Cup...
Good on you for making money by shorting the ETF but at precisely that time the economy was growing at 10%+. The least of China's worries is its stock market and if you've ever seen them literally play the markets you'd realize the futility of using them as a benchmark for economic growth. I've read articles like yours by the boatload and one thing's for sure, nobody's going to convince the other one he's wrong/right. As for improving the productive capacity, that's exactly what China did and is doing. As a poor country you're hardly going to start off development by churning out an Airbus. Even a measly 400$ go a long way in China...
Well, if that's your belief enjoy losing money. Analysis should be based on fundamentals and not random outbursts such as 'China is one big lie' etc.
Tell me again, has China's strategy so far been more of a gradual or 'big bang' kind? It's not really about imports either, it's about getting cheap work moved to Western China and increase purchasing power in the East.
"The problem is that the export-led growth model suffers from a fallacy of composition whereby it assumes that all countries can grow by relying on demand growth in other countries."
China's growth is investment and not export-driven. Exports are necessary to keep investments going. Now that investments in that sector are to a huge degree completed they can concentrate on consumption.
China's already got a decent industrial base and by raising the value of the RMB increasing able to consume the goods it produces.
Excellent speach here
"stanfordbusiness — November 04, 2009 — Bill Browder, MBA '89, founder and CEO, talks about Hermitage Capital Management's investments in Russia and the fall out from the widespread corruption that still pervades Russia's economy. "
Yeah, it's a bit unfair to fault people for being unaware of this. It's a cunning trick employed by politicians. Even now people are happy to spend, spend, spend even though the effects should be plain obvious. My blood boils talking about politicians almost anywhere. In this Great Recession (depression) democracy may be the ultimate victim.
Agree with the other things you said and to be fair I don't know what to do either.
I fully respect your right to the money that you deserve. There is no question about that. You have, over decades, paid in huge amounts of money into the system thinking you'd get your fair share out of it later on. Semms and it is proper. So far, there is nothing to argue about.
However, look at it from our perspective. The money you guys paid into the system was not put aside but spent by the government on issues that apparently had sufficient political will behind them. Should you have been aware of this scam? Can you have your cake and eat it too? That's a contentious point and will surface once budget cuts are put in place. Our generation will have to work hard as well, pay heavy taxes, pay for your pensions (as no money is left) and will receive little by the time we're old. Is it 'moral' to force us into this contract? There's many shades of grey in this debate.