Why Economic Stagnation Will Continue

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Includes: DIA, FXI, PGJ, QQQ, SPY
by: Howard Richman

In an excellent analysis of the current world economy in August 14's Newsweek, Robert J. Samuelson wrote that whether or not global economic growth will surge largely depends upon China's future purchases of imports.

Here is a selection:

Before we get too giddy about any U.S. economic "recovery," we should remember that the preceding collapse was global. No recovery can succeed unless it, too, is global. Will that happen? The world can no longer rely for growth on free-spending Americans, who are overburdened by debt and sobered by trillions of dollars of losses on homes and stocks. Without a substitute for American buying, any global revival will be feeble, because the U.S. needs export-led growth and other countries must somehow offset their lost sales to the United States....

China is the key country in any transition....

What counts is the political and even cultural capacity of countries—especially China—to wean themselves from export-led growth. The world economy is at a fateful juncture. For years, Americans' shopping spree and the jobs it created elsewhere provided a solid political foundation for globalization. With this prop gone, the world needs a new basis for mutually beneficial growth. Without it, we may face more protectionism and economic nationalism.

Samuelson's analysis is approximately identical to the analysis that I gave over 10 months ago (A Worldwide Depression Started This Week). I explained that the global depression that we were then entering had been predicted by Richard Duncan and that it was based upon the fact that the consumers in the net importing countries (especially the United States) could not keep borrowing forever to finance increasing purchases of imports, that they would have to pull back.

I explained that the worldwide depression would not end until China and the other net-exporting countries changed their policies and started buying more imports. I also predicted that China would not be quick to change from her successful policy, which was based upon a high consumer savings rate.

I did not foresee that China would plow huge amounts of government loans into government enterprises so that they could add to the world's excess industrial capacity during the recession.

Nor did I foresee that her government enterprises would build up their inventories of commodities as a way to spend their huge loans, and that these buildups of commodities would temporarily stimulate the commodity exporting countries, including Russia and Brazil, sending a temporary ripple of economic growth through the world economy.

But China's plan is perfectly consistent with her decision not to give up her export oriented strategy. Most economists now think that the great recession is about to end, so it is encouraging to me to read one of the best of America's economists explaining that it is not while giving the same reasons that I explained back in October.

And Samuelson is not looking to the international institutions for a solution. Like me, he must realize that they are hopeless failures:

  • World Trade Organization. All countries agree to give up their export-subsidies when they join the WTO. Yet the WTO never forced China to give them up and is allowing her to increase them throughout the depression with impunity.
  • International Monetary Fund. All countries agree to give up currency manipulations when they join the IMF. But currency manipulations have lain at the heart of China's export-oriented strategy and the IMF has yet to do anything about them.

Even though he so clearly understands the problem, Samuelson doesn't advocate any solutions that are within America's grasp. As I pointed out in October, either China could switch from its export strategy on its own or United States could insist on balanced trade and force them to switch. Either strategy would work. But Samuelson is waiting around for China to change and not advocating that the United States take the action that we could take.

Samuelson needs to look realistically at what is happening, since China's present policy is the best indicator of what her future policy will be. The following graph of the latest US-China trade balance appeared in a Seeking Alpha commentary that I wrote a few days ago:

Samuelson believes that during the most recent three months shown in this graph, the Chinese economy "expanded at an impressive 7.9 percent rate". In contrast, we know from US government statistics that US GDP was shrinking at a 1% clip during those same three months.

Normally when one country is growing and the other is shrinking, the growing demand in the growing economy results in more imports from the shrinking economy, and the shrinking demand in the shrinking economy results in fewer imports from the growing economy. That's basic economics.

However, due to China's many trade manipulations, the US trade deficit with China expanded every month from April through June. Clearly the Chinese government is doing the opposite of what Samuelson recommends.

President Obama should be telling China that she had better start reducing the US-China trade deficit, or we will gradually limit our imports from China, through Import Certificates, until trade is balanced. If China wanted to continue her high level of exports to the United States, she would have to take down her many tariff and non-tariff barriers to American products and let her currency rise to its proper level in relation to the dollar.

Instead, America waits around helplessly, hoping that China will someday change from her successful export-oriented policy all on her own. But why should the Communist government of China change? Under the present arrangements China will continue to grow while the United States will continue to stagnate. Eventually the Chinese Communist Party will dominate the world, as government of the world's premier economic and political power, while her political enemy, purveyor of the democratic ideas that the Chinese government fears, will become an economic has-been.

Samuelson worries that economic nationalism and protectionism might take root in the world if China doesn't change on its own. He is worried about a worldwide round of tariffs and counter-tariffs.

But currently the United States suffers from trade masochism, not trade nationalism. We practice free trade while China manipulates trade in order to steal market share from our industries. The result is that China prospers while our economy deteriorates. Our masochism enables China's sadism. It is neither good for the United States, nor for the world economy.

Import Certificates that balance trade solve our problem and the worldwide depression at the same time. Strong worldwide economic growth would occur if we were to adopt a nationalist economic policy!

Disclosure: No positions