I think we should forget about fixing the deficit for now at least. Fixing it will have little or no impact on the economy, and rather may even reduce the aggregate demand. Worrying about the “deficit!” when we’re in a serious recession is like lecturing a guy on eating right while he’s having a heart attack. Valuable words, but advice that should have been followed for years before this event. Rather I think we should take on a huge new fiscal stimulus, coupled with devaluation of the dollar. (By the Fed tearing up some of the debt it holds).
Palantir Wrote: ------------------------------------------------------- > Rather I think we should take on a huge new fiscal > stimulus, coupled with devaluation of the dollar. > (By the Fed tearing up some of the debt it holds). I don’t see any other outcome. The Fed’s exit has to include unloading debt that will likely get pennies on the dollar. As I understand it, the Fed can just write these losses to the deficit, who knows how much a trillion $?? We’ll see if Uncle Sam can digest the pig.
The problem with devaluing the dollar, is your borrowing costs WILL skyrocket. Now that other countries know you’ll screw them for lending you money, they’ll screw you to lend you anything from now on. Devaluing should be the last resort right before defaulting.
iteracom Wrote: ------------------------------------------------------- > The problem with devaluing the dollar, is your > borrowing costs WILL skyrocket. Now that other > countries know you’ll screw them for lending you > money, they’ll screw you to lend you anything from > now on. > > Devaluing should be the last resort right before > defaulting. You have the correlation/causation backwards. The US is not borrowing cash from China to finance our spending, China is borrowing demand from the US to employ it citizens at below market wages. In order to keep exporting to the US -> China must keep its currency undervalued; in order to keep its currency undervalued -> China must buy Treasuries. Savings = debt as described above. Below is a nice excerpt from Michael Pettis’ always informative newsletter from earlier this month. “Take the US-China case, for example. The US has been arguing for years that China had to raise the value of the currency sharply in order to rebalance the global economy and bring down China’s current account surplus and, with it, the US deficit.” “China responded that it could not do so without causing tremendous damage to its economy and that anyway the problem lay with the US propensity to consume. For that reason China continued to accumulate US dollar assets. As it bought US government bonds it was able to generate higher domestic employment by running large trade surpluses, with corresponding deficits in the US. Remember that net capital exports are simply the obverse of trade surpluses (or, more correctly, current account surpluses), and one requires the other. If China buys huge amounts of dollars, the US must run a trade deficit.” “Whichever argument you think is the more just – that the imbalances are mainly the fault of the US or the fault of China – since the Chinese accumulation of US Treasury bonds was the automatic consequence of Chinese policies that the US opposed, it seems a little strange that the US should feel any strong obligation to maintain the value of the PBoC’s portfolio. That is not to say that the US should not be concerned about inflation and the value of the dollar – only that the reasons for its concern should be wholly domestic.”
Yeah, it’s really hard to separate out the US-China entanglement. US is borrowing a lot because China is supplying cash. China is supplying cash so that the US can use it to buy Chinese goods. The US and China are like these two black holes orbiting each other, and the rest of the world economy gets dragged around. It sounds on the surface like a closed loop - china financing its own products, since, at the time the debt is incurred, the pain comes later for the borrower, and China keeps people employed. It’s not quite a closed loop, but it does eventually have to reverse, and it is likely to be highly disruptive if/when it does. Whether it is reversing right now is a key question. Most people expect that with the US consumer debted out, China will have to shift to a domestic consumption model, which it is clearly trying to do… and yet our trade deficit is still high and rising, presumably because even with an appreciation of the Yuan, Chinese labor costs are so low that US workers still find it hard to compete, despite higher productivity here.
Good points. I would argue that rather than shifting to a domestic consumption model they have instead shifted to a fixed asset investment-driven model and are employing their citizens building empty cities. In China’s case the debt bubble is being built on the borrowing done by local governments who are incentivized to hit predetermined growth targets - if they are not on track to hit 10% growth each year then they finance construction to make up the difference. Consumption is only 30-35%ish of Chinese GDP compared with 70% for the US and 60%ish for Brazil. At such a low percent of GDP the economy cannot really grow from consumption increases alone. Exports seem unlikely to grow strongly for the reasons you pointed out and even construction spending will run out of room eventually. I am in the camp of the China bears who think the overall economy will slow a lot even as consumption picks up similar to Japan in the 80’s. Good for consumption/wages but bad for asset prices and SOEs. I have written about this extensively on my blog if you are interested. http://natebyrd.blogspot.com/search/label/China
^enter the U.S. marketers to help the Chinese realize how much they need consumer goods. It only takes one person in the neighborhood to start spending that cash. Then the “keep up w/ the (insert Chinese equivalent of Jones’s)” phenomenon kicks in. Then we run out of resources and the world goes to sh!t anyway, oh well.
Damn. I did not realize how messed up this was till reading the above posts.
Dwight Wrote: ------------------------------------------------------- > Good points. I would argue that rather than > shifting to a domestic consumption model they have > instead shifted to a fixed asset investment-driven > model and are employing their citizens building > empty cities. In China’s case the debt bubble is > being built on the borrowing done by local > governments who are incentivized to hit > predetermined growth targets - if they are not on > track to hit 10% growth each year then they > finance construction to make up the difference. > > Consumption is only 30-35%ish of Chinese GDP > compared with 70% for the US and 60%ish for > Brazil. At such a low percent of GDP the economy > cannot really grow from consumption increases > alone. Exports seem unlikely to grow strongly for > the reasons you pointed out and even construction > spending will run out of room eventually. I am in > the camp of the China bears who think the overall > economy will slow a lot even as consumption picks > up similar to Japan in the 80’s. Good for > consumption/wages but bad for asset prices and > SOEs. > > I have written about this extensively on my blog > if you are interested. > > http://natebyrd.blogspot.com/search/label/China While China has made tremendous investments in fixed assets I think the empty cities comment may be a bit overblown. In China we see a country that is very much a third world country with third world infrastructure, rapidly becoming industrialized. Throw into the mix that they are also experiencing the most rapid period of urbanization the world has seen and I can see the rationale for arguing that there is not over investment in fixed assets in China. With that being said I wouldn’t make a bet either way. P.S. I like your comments, I will definitely check your blog out.
bodhisattva Wrote: ------------------------------------------------------- > Dwight Wrote: > -------------------------------------------------- > P.S. I like your comments, I will definitely check > your blog out. bromance?
Analti_Calte_Equity Wrote: ------------------------------------------------------- > bodhisattva Wrote: > -------------------------------------------------- > ----- > > Dwight Wrote: > > > -------------------------------------------------- > > > > P.S. I like your comments, I will definitely > check > > your blog out. > > > bromance? Heh, not quite
bodhisattva Wrote: ------------------------------------------------------- > While China has made tremendous investments in > fixed assets I think the empty cities comment may > be a bit overblown. In China we see a country > that is very much a third world country with third > world infrastructure, rapidly becoming > industrialized. Throw into the mix that they are > also experiencing the most rapid period of > urbanization the world has seen and I can see the > rationale for arguing that there is not over > investment in fixed assets in China. With that > being said I wouldn’t make a bet either way. That’s a fair point. China is a third world country and there is nothing theoretically “wrong” per se with allocating a lot of resources to getting their infrastructure up to par. Certainly I would agree that the potential productivity gains from urbanization and moving up the skilled labor chain are large, I just do not think productivity and wages (i.e. “real” economic growth from consumption) are increasing as much as commonly thought and I believe much of the growth has been illusory. It is interesting to note that China’s stock market has gone nowhere for the past few years since the financial crisis even though growth has chugged along at a steady 10% per annum. It is complicated, but in my view if you are spending all the resources of your economy putting up buildings you get a huge boost to GDP in the short term but it comes back to bite you later. Paul Krugman said it well prior to the Asian crisis in the 90’s: “Economic growth that is based on expansion of inputs, rather than on growth in output per unit of input, is inevitably subject to diminishing returns.” As an example say you are building a transportation infrastructure for a city and calculate that 10 years from now you are going to need 10 large steel bridges. Furthermore assume that you need to allocate the resources of one steel plant per year per bridge for construction purposes. There could be a couple of ways to go about this project. One option is you could have one steel plant humming for 10 years and build one bridge per year for 10 years, spreading out the investment over the life of the project. Another option is you could tie up 10 steel plants for one year and build all 10 bridges so that they are ready 9 years early. The important thing to me is that under option two you end up with a lot of economic activity in year 1 and everything looks like spectacular growth. But then by year 2 you start to realize that you now have 10 idle steel plants, a bunch of unemployed bridge contractors, and bridges that no one is using yet. So you need to find another project to keep everyone busy. Jim Chanos (who famously shorted Enron) refers to this the “treadmill to hell”. The problem is one of coordination with central planners attempting to anticipate the needs of a dynamic economy. Russia and Japan both experienced similar problems with attempting to transition from an investment-driven economy to a consumption-driven economy. At the time economists were all forecasting their predicted dates that these countries would surpass the US in economic growth based on extrapolating the recent past. History repeats.
Great blog, by the way. I need to get back to doing mine.