odin

Two Proofs That Global Economy Is Not on the Upswing

In a global downturn, its precisely those countries who run a massive surplus that get hurt the worst. The evidence is clear from the previous global downturn (notably the Great Depression).

Ultimately, a nations ability to spend/overspend is dependent on someone else's willingness to finance it. Hence, the US has been able to maintain a deficit (apart from the fact that it promises to repay in a currency that it prints -- nearly all its debt is local debt and global trade for the most part happens in USD). If China tries to run US-style deficits for a period of time, how many investors will be willing to hold RNB-denominated debt cheaply (US-style rates)?

Infrastructure investment is good to a point. There is such a thing as over-investment as well. And looking at spending in real estate (office space etc), I often wonder who it is that will occupy all this space. (See: articles.latimes.com/2...)

The purpose here is not China-bashing, its more to clarify the situation so the right policy measures are idenfitied.

It is clear that by keeping the yuan undervalued, China has, in the past, transferred buying power from the consumers and workers to the exporters (and the world in general - exporting deflation). The challenge now is to keep its massive population employed. Pumping expensive money (via leverage) into an overleveraged world to keep up its exports is not going to work any longer. It needs to spur internal _consumer_ demand -- this is the distinction made by the article. Commodity buying is not consumer demand -- it is an investment to spur exports or to build offices and highways that support the export industry.

The real change needed is to empower the workers and the consumers via investment in health infrastructure, social security. To cushion the inevitable slowdown in global trade, China needs to consume, rather than add to global overcapacity.