odin

Struggling with Divergences

Not sure about Fannie and Freddie but I have heard a variant of that explanation in China. Several retail punters claimed that lower priced equities were "cheaper" and thus a better value than higher-priced equities.

China's Statements About U.S. Debt Are Overblown

For the same reason domestically a rich man wants to trade with a poor man in the same country.

Life is mean-reverting in the very long run but we still struggle to maintain our relative advantages.

I dont buy that trade is a zero-sum game. While we export jobs to China, China exports goods to us to raise our std of living (supposedly... those $10 flying choppers ARE terribly entertaining... who would have thought even 10 years ago that you could buy a sophisticated flying toy with a microchip for $10!), Net-net, China has future claims against the US and hopefully will exercise them in the future when they run a deficit and provide employment to a new generation of Americans.


On Jun 01 03:46 PM infp wrote:

> On a very simple level, I never understood how globalization could
> be broadly beneficial for a wealthy country like the US. If an average
> US worker is making $20/hour and an average Chinese worker is making
> $1/hour, eventually I would expect them both to make $10.hour. I
> do not offer this extremely simple observation as an indictment of
> globalization, I simply offer it as my expectation that some sort
> of global salary equilibrium is inevitable in a global economy.

China's Statements About U.S. Debt Are Overblown

On Jun 01 01:08 PM Donald Ingram wrote:

> First;
> The Chinese don't mind "taking the hit" as you put it. However it
> will be at a time of their choosing. Get ready for the rug to get
> yanked!

Very true. The Chinese central banks (or the ruling regime) may be less concerned about the yield on their fx reserves. The main agenda is the value of the RMB (to keep its factories humming and provide continued employment). However, the Chinese are giving up current consumption by accumulating these reserves -- they should want to consume them at some point as the bulk of their population moves through its productive years into retirement (20+ years down the road) with a much smaller workforce to support them (1-child policy). Low US inflation and safety of principal is not totally irrelevant to them.

> Second;
> "Need these exports"? They would be nice to have, but they really
> don't "need" them to survive and prosper.

Sure they do. Tiannenmen Square happens when you have hundreds of millions of unhappy people. Rising standard of living is what keeps people happy. Pissed off Chinese workers agitating for a revolution is a key "black-swan" event in my play book. It is likely that risks of violent conflict between nations rise in that case to build up nationalist sentiment and deflect attention from domestic problems (Taiwan, Japan look to be the main sufferers in this case. It is not lost on me that many major economic crises have been followed by wars. It is also an important point that in the thousands of years of history -- China and Japan have never shared regional power and there is considerable latent hostility in china towards the former imperial power, which by all measures is collapsing under the weight of demographics.)

However, the export-policy is not sustainable. They need to increase _PRIVATE_ domestic consumption. Stockpiling commodities or growth in state-sponsored behemoths is not the answer. The commodities are only as valuable as the strength of the buyers that the Chinese will want to sell their exports to. And related to domestic civilian growth projects -- someone should _need_ and want to occupy the building complexes that are getting built. It is not clear to me that spending on infrastructure mega-projects in China is the need of the hour. They have a terrible history of inefficient use from a cost-benefit perspective (Three Gorges for e.g.). Growth in China has come entirely from its coast -- I want to go further and cautiously add that it can primarily come only from its coast (interior of china is parched, relatively sparsely population though I am unfamiliar with the availability of other natural resources...). China needs to spend on education, healthcare (with pollution levels having exploded in the past 20 years, its only a matter of time before the piper will need to be paid), social safety nets (domestic harmony -- despite the cultural norms, it is unlikely in the long run that 1-2 productive adults will not be stressed about supporting an additional 4 non-productive adults+kids).

> Third;
> They know EXACTLY what their course of action is and where it's going.
> To assume otherwise would be to underestimate them. Big mistake.

The Chinese government is indeed far-sighte--more so than a democratic one would be--but precisely for that fact, it is also constrained by the politics of their situation. But it would be folly to assume that the decision-makers are not narrowly self-interested.

>
> Fourth;
> They are moving into gold in a big way. The central bank of China
> has already put in a reserve bid for the upcoming IMF 403 tonne gold
> sale. All of it! Good way for them to unload some their US dollar
> holdings!

As pointed out in the article, the supply of gold is very limited and it is not possible for any central bank to accumulate meaningful amounts of gold without moving its price. (And higher gold price implies inflation...something the Chinese do not necessarily want, if they want to maintain Chinese competitiveness).

> Fifth;
> Real estate prices are a fore gone conclusion, they will be in the
> tank for years to come.

While very true that it will take years to recover and may not "bubble" again for decades, "they dont make land anymore". But a growing population will still need to be housed, construction still depreciates and in an inflated future, real estate does maintain its value. Speaking of which, do you think the Chinese central bank will want to buy Las Vegas from us?

> Sixth;
> The Chinese Yuan (Renminbi) will be the next worlds reserve currency.

The reserve currency status is mainly determined by military strength. China, undoubtedly growing in this regard, has a lot of distance to cover before it can lay claims to this. It needs to float its currency to become a reserve currency (causing it to rise and lower competitiveness of Chinese exports). Rationally, the time when China will want to do that is when it is cashing in its claims on world productivity (when its aging population causes a trade deficit and it is no longer accumulating $ and has much weaker _economic_ growth prospects). Remember, the TIC data shows that China even now is accumulating US $ reserves (at a pace not too far removed from the frantic one we saw in 2008)

> This is what the Chinese are working towards. Yes, it will take years,
> but what are years when you plan in generations?
> Seventh;
> This is the most asinine presumption of all - "Work off the debt?"
> Your children, your grandchildren and their children will thank you!
> The only way the debt will be paid is with dollars that are worth
> pennies!

The only two ways to pay off our debts (private or public) is to either inflate it away (very likely in the long run but unlikely in the short run) or to grow into it. I think the combination is the most likely scenario.

Waxing a little philosophical: growth due to technological shifts should not be underestimated -- take any snapshot in time (20 years, 50 years, 100 years) and its amazing to me the exponential explosion in knowledge. Average quality of life is still on a upward trajectory. And the US is on the forefront of such growth. We may not feel that way because expectations of what "average" std of living have been rising faster than the actual rise. I am very optimistic about the future of the US -- by far, it is the one nation that is most open to progress, the most innovative and the most welcoming and nurturing of raw talent. And a part of the "hostility" that Americans sometimes feel abroad is somewhat traced to this I think -- with 24x7 info flows (CNN and American pop culture exports), people in repressed regimes often ask: 'Why do we not have that?' The answer accepted (and sometimes given by their ruling regimes) is not often based on self-evaluation but by deflecting blame onto Americans.