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Andy Xie gives no quarter

by Brad Setser
July 26, 2005

Xie to the market (and to the US): Take your 2% and stop telling China to revalue!

Here is the difference between Xie and me, put simply.

Xie thinks the US is trying to get China to "artificially" push up Chinese wages.

The vast US trade deficit … cannot be solved by artificially raising Chinese wages.

I think a country that is spending $260-300 b (14-16% of its GDP) to keep its currency from appreciating is artificially holding down Chinese wages and Chinese purchasing power.

In the process, China — not just the Fed, as Xie argues — artifically holds down US interest rates.  That helps the US in some ways.  Certainly in the short-run.  But doing so has long run costs, on both sides of the Pacific.  The US is storing up a big adjustment, as resources will have to flow out of interest-sensitive sectors at some point.  And resources will likely also have to flow out of China's export sector, or at least Chinese factories will have to regear to serve China's internal market.  To those adjustment cost, add the massive bill China's taxpayers will get when China realizes the costs of the massive "subsidies" its central bank is now providing to China's offshore customers.   Buying high (i.e. buying dollars at 8.28 RMB, or 8.11) and selling low (selling dollars for RMB at 7, 6 even 5 RMB to the dollar) is a pretty sure fire way to lose money.

And it is not obvious that China is better served subsidizing American consumption rather than putting its money to work at home.  Joe Stiglitz has long defended  China's peg.   But he — like Roubini — worries that China might be better able to adapt to the loss of the US export market than the US to the loss of Chinese financing.  Stiglitz's warning to the US needs to be taken seriously:

China could easily make up for the loss of exports to America – and the wellbeing of its citizens could even be improved – if some of the money it lends to the US was diverted to its own development. China has huge investment needs. If its government is going to lend money, why not finance its own development? Why not fund increased consumption at home, rather than that of the richest country in the world, to pay for a tax cut for the richest people in the richest country, or to fight a war which most view as anathema?

The CIA calculates that China's 2004 PPP GDP is around $7300 billion – a bit over $5,500 per person (link from PGL of the Angry Bear).   At market rates, China's (2005) GDP is only $1850b, or a bit under $1500 per person.  The large gap between China PPP GDP and its GDP at market value – even taking into account the fact that poor countries usually have a market GDP well below their PPP GDP – is what leads Jeff Frankel to conclude that China's currency is undervalued.

That matches my own subjective economic development smell test.   Beijing looks like the capital of a country that is wealthier than say Turkey, not the capital of a country that is just starting to develop.  And I don't think that is just because Beijing is the capital of a very large country.

Be forewarned – I'll probably be focused almost exclusively on China for the remainder of this week.  I want to return to CNOOC (in the interim, read this from Brainard and O'Hanlon), to comment on the Wall Street Journal's excellent article on US/ Chinese dollar diplomacy – and China's internal currency politics, and to talk a bit (more) about China's reserves.

54 Comments

  • Posted by DOR

    Question 1: What’s the difference between spending 14-16% of GDP preventing the currency from appreciating and spending 14-16% of GDP to keep inflation under control?

    Question 2: When did PPP become an acceptable measure of the size of an entire economy?
    .

  • Posted by MTC

    “Beijing looks like the capital of a country that is wealthier than say Turkey, not the capital of a country that is just starting to develop. And I don’t think that is just because Beijing is the capital of a very large country.”

    I am afraid that the size of one’s territory does make a difference in the wealth and glory of the capital. Take Vienna, for instance. Ridiculous for modern Austria, quite natural for the Austro-Hungarian Empire.

  • Posted by MC3

    “I think a country that is spending $260-300 b (14-16% of its GDP) to keep its currency from appreciating is artificially holding down Chinese wages and Chinese purchasing power.”

    Its not only applicable to China. Several economies around the world are trying to get “advantage” of that picture. USD needs to keep high valued so the biggest consumer machine in the world (a.k.a. the US) can keep going on

  • Posted by brad

    DOR: By resisting appreciation, China is actually making it harder to keep inflation under control. The inflationary consequences of reserve growth can be limited by sterilization, but that adds to total cost of reserve accumulation in a cash flow sense by substituting interest bearing liabilities (PBOC sterilization bills) for non-interest bearing liabilities (otherwise known as cash).

    And please read Frankel — available on RGE. He does not argue that PPP provides a good guide for the market exchange rate for an emerging economy. He does argue that even in relation to other emerging economies, China’s exchange rate (in market terms) is low relative to China’s PPP exchange rate. The market GDP to PPP GDP ratio should not be one, but it should be higher than .25, more or less.

  • Posted by brad

    MC3 — Russia for one comes to mind.

  • Posted by PC

    You wrote:

    And resources will likely also have to flow out of China’s export sector, or at least Chinese factories will have to regear to serve China’s internal market.

    Have you been to China Mr. Setser? I don’t mean show case cities like Shanghai and Beijing. Have you traveled to the second tier cities and rural areas in China? If you have you will realize the so called “vast” China market is not so vast. The majority of China is still very poor with huge unemployment problems. May I suggest you travel extensively within China before becoming a China expert.

    You also wrote:

    Buying high (i.e. buying dollars at 8.28 RMB, or 8.11) and selling low (selling dollars for RMB at 7, 6 even 5 RMB to the dollar) is a pretty sure fire way to lose money.

    So you are making a foregone conclusion that the RMB will appreciate against the USD for sure over the long run. I guess this is based on economics 101. The same economics 101 that dictates that the Dollar has nowhere to go but down. Having such a sure opinion is a “sure fire” way to lose money in markets.

  • Posted by sun bin

    http://www.economist.com/displaystory.cfm?story_id=4104209 (subscription -
    my blog has some high level summary)

    The Economist in June talked about different measures for how much RMB is undervalued. i think the more conservative ones (used by Morgan Stanley and Goldman Sachs) proposed 7-10% prior Jul/21. But I do not know how to calculate FEER and BEER (Brad, is there good reference on the web about these tools. I think a few people here are very math savvy :) )?

    There is an argument that the appreciate will be managed such that it is under 2.5% p.a. from now on (mainly to make hedging not worhtwhile), regardless of what the fair market value should be.

    Which WSJ article is it? I have the paper version but cannot access the online one. I actually found the WSJ of the past few days on this topic to be more than fantastic.

  • Posted by sun bin

    I think Xie wanted to say “The vast US trade deficit … cannot be solved by raising Chinese wages.” view the word ‘artificially’ as a Freudian slips of “in Xie’s view”.

    I think what Xie mean is “move on, you will waste your time telling China to reval. they have many reason they will not do it, whatever pressure you put on them.”

    I agree with Brad that there is an undue appreciate in purchasing power and wages for the average Chinese, and the general direction should be another moderate reval. But as we know, the reality (or even the market) seldomly rest at the equilibrium position.

  • Posted by brad

    Sun bin — It was the a1 article in the monday US edition of the journal. Presume it also ran in other editions –

    PC. I don’t pretend to be a China hand — I have spent a grand total of ten days in China, and just have visited two cities, Chongqing and Beijing. I have spent the past eight years looking at the balance of payments of emerging economies. I actually cut out an explanation of why the RMB would rise that was in the post — hard as it may be to believe, i want to reduce the length of my blogs. The argument is simple: China’s government is spending 15% of its GDP to keep the RMB from rising. If you get rid of that intervention and do not change anything else, the RMB would rise. Right now there is more demand for RMB than there is supply in the fx market. China is not going to drop its capital controls, and without massive domestic flight out of the banking system, i do not see where the offsetting flows would come from to generate equilibrium in the fx market at current rates if the government stopped intervention. Offshore chinese money is voting with its feet: in 98 and 99, it wanted out; from 2003 on, it has wanted back in, in a big way.

  • Posted by sunbin

    I think Stiglitz is right in that China should use the money to invest domestically. However, there are some caveats.
    i.e., who is going to make the investment decision? if it is PBC or those 4 major banks, we have a problem. The yield of investment might very likely turn out ot be lower than that of US Treasury.

    China needs to establish some investment board and act like CALPERS, or employ professional investment managers, to take care of this surplus fund. (assuming $[500]BN is enough to cope with another Asian Flu)

    the other question I have is rather technical. to the economist, would over-spending on domestic infrastructure lead to budget deficit? (i assume stiglitz was asking the gov’t to spend the money, otherwise, who else?)

  • Posted by sunbin

    Brad,

    I think a better comparison to Istanbul is Chongqing. I think size/scale does matter in the case of Beijing, like the CEO expense account of Morgan Stanley vs that of say, Whirlpool.

    Even in Beijing, you will see many area, and many people (esp the migrant workers), who live in a much poorer condition than the poor in Istanbul.

  • Posted by FTX

    Andy Xie said:

    “However, until the US economy shows serious weakness, which may happen 12 months hence, the pressure on China should remain below the boiling point.”

    And then what?

    We’ve yet to see a top in the US real estate market, but when we do, it’s likely that US consumer demand will abruptly slow 9 to 15 months later. It’s at this point when the structural chickens come home to roost and the unemployment numbers begin to take a major turn for the worse.

    If the RMB/dollar level is much the same as it is now (or even another 2% higher) then the protectionist clamour will resurface in earnest, and this time it will go far beyond the sabre-rattling we’ve had over the past year or so.

    I don’t know how quickly Professor Stiglitz thinks China could meaningfully redirect investment flows, but a year is like the blink of an eye in this regard.

    Irrespective of whether or not a higher RMB will actually help address the US trade deficit, the recent revaulation has simply put off the day of reckoning unless there is further significant movement over the next couple of years.

    It’s hard to believe the Chinese aren’t sensitive to these concerns. They surely don’t want China to end up as the fall guy for America’s excesses.

  • Posted by Stormy

    (Posted in abbreviated form at Angry Bear’s)

    Vietnam or India next?

    Interesting comments on foreign electronic firms in China, from ComputerWorld.

    “China’s currency revaluation raised the cost of paying worker salaries at the thousands of electronics factories across the nation, but that won’t impact end-user prices for IT goods like PCs and servers, analysts say.”

    The beginning of the article discusses the effect of the recent rise in the RMB on foreign electronic firms in China–these are firms making products to sell primarily to the developed world. For example, the last rise will cost Canon about $82 mil.

    “A few points a year could add up over time and start a trickle of offshoring from China to less-expensive developing nations like Vietnam to keep costs down. But in the next few yeas, the electronics industry won’t see much impact from China’s currency revaluation.”

    http://computerworld.com.sg/ShowPage.aspx?pagetype=2&articleid=2113&pubid=3&issueid=56

    It is clear to me that from this article that China is not a market for these firms. It takes time for a very large and poor country to become a consumer of advanced western goods. Trade magazines like ComputerWorld tell it like it is. In short, the rise of the RMB is not in the interest of FDI in China, but the present small rise does not significantly affect margins.

  • Posted by Anonymous

    “i want to reduce the length of my blogs.”

    Why?

  • Posted by Steven M

    Brad– I want to thank you for making the points which you make. Your insights are like a steady drumroll urging us to refocus attention on the true economic health of our country.

    it’s true, there is no reason to think that China won’t prefer to spend money on itself, rather than on us, (now that it no longer needs to buy US bonds to stabilize its own currrency).

    Your clear points whow how short-sighted our own policy, and how much we need to regain our ability to address our common economic priorities, and to direct a common effot to balancing the budget, restroring our industry, and investing in training.

    I’m a little surprised by some of the other posters. Sunbin, there is no issue of deficit or over-spending for China involved here. They have massive exces capital. furthermore, they are a Communist country. To worry about the effects of over-pending is to miss the point.

    Furthermore, I don’t think the real point is the relative strength of Chinese society, prosperity, etc. I think the point is that they have domestic priorities they would rather spend their money.

    I’m sorry, I don’t totally understand the direction of some posts. Mr. Setser is making some extemely important points regarding our overall economic direction. he has consistently highlighted the pitfall and the issues we need to be aware of for helping the US economy. I would suggest we focus more on that, at least as much as on economic anlysis and predictions. Thanks.

  • Posted by sun bin

    Steven M,

    I know China probably has budget surplus now. I also undestand (and stated I agreed) that China has its problem to solve, though I am not sure if they have the solution to it (problems other than what money can do).
    But i doubt it is a major surplus. Depending on how much you spend, at some point you would go into deficit? My question then is: is it good to tackle a problem of appreciating currency via budget deficit? I think this is a legitimate academic question (which I don’t know the answer), and apply to China, the US, and any other country.
    I also don’t understand your point of communist country. Do you mean the economies for N Korea or Cuba will be sound if they spend loads of money on developing Nuclear programs?

  • Posted by brad

    Sun bin — more spending infrastructure need not lead to a fiscal deficit; it all depends on how it is financed. but in order to reduce China’s “savings surplus” it would help if the government borrowed to build new infrastructure, providing a net drain on private savings (see: USA).

    As for why cut the length of my posts — look at the one on eurozone data. it sprawled, and tried to cover too much ground and was rather too complex. I suspect the the blog format is better suited to making a few direct points per post, not trying to cover the world.

  • Posted by MG

    I see we’re back to the skinny columns…

    Oh, well.

  • Posted by Movie Guy

    Welcome to the New World and the Black Box Peg

    Re: Andy Xie and Stephen Roach, Morgan Stanley

    PART I – FACING THE REALITY OF TRADE POLICIES AT 37,000 FEET

    Imagine going to sleep one night at your home and awakening the next morning to find that you are on an airplane flying at 37,000 feet. You look around the cabin. When you have the opportunity to talk to the flight attendant, you ask her (I like ‘her’ better – and let’s make her good looking)… you ask her, Where are we going?” She looks down at you as if you’re clueless and says, “We’re going to the future!” You ask where that is. She says, “To the land of globalization and equality.” Again, you ask, “Where is that?” She replies, “In the future,” and walks on up the isle. She didn’t offer any peanuts, by the way…

    You get the idea. This is happening to me, so I’ll share the rest with you.

    I feel a nudge from the passenger to my right side. He looks at me and says, “Yeah, I asked her that already. Same answers.” Before I can ask him a question, the woman in the seat in front of me raises up, turns around, and says, “Hi. I’m from India and I recognize you. I handle all of your administrative backroom tasks for your business. We’re going to the future!” Before I can respond, the fellow across the isle waves at me and says, “I forgot my passport. But I like this flight.” He is from Mexico. And he is going to the future. The kids running up and down the isle from all parts of the world are like all kids. Having fun. Innocent. And happy. Perhaps happier on this flight. One little boy rushing by stops momentarily, and whispers, “We’re moving…to the future,” and then runs down the isle to join his friends…from all over the world. I smiled.

    The point is simple. We are adjusting our future reality to allow for an acceleration in global expansion. Whether we are doing it in the most effective and painless way remains to be seen. But we didn’t start out at 37,000 feet, flying to the future based solely on currency valuations and consumer demand. We planned this. We built the airplane. Fueled it. Selected a flight plan. Then lifted off on our journey.

    That economic journey began with trade based on formal trade policy. And we have changed our trade policy.

    Trade policies built around tariffs and other fees are quite different, naturally, than trade policies built around the near-term reduction and ultimate elimination of all tariffs and other fees. The United States joined the WTO, which absorbed the GATT regulations. The accelerated effort to eliminate tariffs focused initially on large concessions by major trading nations, followed by concessions from other member nations in descending economic order. Member nations are still negotiating their way through that process.

    The United States, as an example, opened its borders to greater trade. Trade not based solely on the principal of comparative advantage, but trade based on openness. An open door policy if you will, presently impeded slightly with an average tariff on goods and services of 3.6%. And that tariff percentage is continuing to decline, representing a greater open door policy. Among the trading partners of the United States is a rapidly developing nation which has labor rates of 1/20th to 1/25th of U.S. labor rates. That is China. And China’s labor costs, other production advantages including quick grasp of technology, and educational growth are capturing a growing share of former United States, Central American, and other Asian finished goods production.

    The trade policies of WTO and the USA are most assuredly the starting point for discussions of trade, economic performance and comparative advantage. Once recognized and acknowledged as having a profound effect on domestic trade performance, the other factors including currency valuation, consumer demand, and commodity pricing logically become the principal issues of discussion because such factors represent variables of adjustment in the trade policy picture. In other words, they influence the effectiveness of trade policy. Rest assured, though, that trade policy changes have an effect on the economic performance and competitiveness of the United States as such policy changes resulted in laying the foundation for a growing shift in the economic landscape of the United States. No question.

    If I am fortunate, I will awake in the morning in my own bed. But it’s unlikely. Just looking around indicates that I am still on the airplane headed to the future. Wherever that may be. We may experience a soft landing if we don’t run out of fuel, but there is quite a discussion ongoing in the cockpit. And some well-heeled passengers in first class, having too good a time, are banging on the cockpit door again. Yelling and spilling their drinks, of course. Telling the pilot that everything will be fine. Don’t worry about it. We have credit cards. No sweat. And so on. But the senior pilot who opened the door looks concerned. Of course, the newspaper I found in the seat compartment has a story explaining that his pilots union pension fund is near bankruptcy. I expect that that might worry him. As well as the loud, well-heeled crowd. The same ones chasing the flight attendant who didn’t give me any peanuts. I believe that she is pouring champagne up there…including one for herself. Interesting flight. Wherever we’re going.

    I believe that I will go back to sleep now. And pray for a soft landing. I will probably dream about peanuts. I may have seen my last bag of those. On this flight, anyway.

  • Posted by Movie Guy

    Welcome to the New World and the Black Box Peg

    Re: Andy Xie and Stephen Roach, Morgan Stanley

    PART II – POST TRADE POLICY REALITIES AT 37,000 FEET

    Yes, we’re flying to the future. The pilot announced that we will be receiving a mid-air refuel in a moment. This must be a long flight. I can see the tanker off the right wing now. That looks like a repainted KC-130. You know. A Boeing 707. Wish it was a newer jet. I hope this works. Mid-air refueling is difficult. I am going to put on my seat belt. Yeah, there’s the light now. Fasten up. No sign of the flight attendant. Still no peanuts back here. Most people are asleep. Appears to be the norm on this flight. That and watching movies.

    The present global trade situation is explained in brief in the following documents.

    Existing trade policies resulting in the reduction of trade barriers, as an underlying basis for globalized trade growth, coupled with currency valuation changes, an ongoing global economic recovery, and consumer demand growth provide the general basis for the following 2004 analysis.

    I agree that currency valuation changes have adjusted the import-export landscape in Europe, stimulating growth in 2003 and 2004. Moreover, I note that more changes are on the way as evidenced by the recent 19% growth in imports from China to Europe.

    Currency valuation changes, though, do not explain the USA’s 24% growth in imports from China during the first five months of this year. The China peg to the U.S. dollar, in effect until last Thursday, 21 July 2005, eliminated the currency valuation consideration from explanation regarding trends in U.S. imports and exports as addressed in the following presentations. And there is little near-term expectation that the black box peg that China has since adopted will alter its currency value substantially going forward. Message received.

    These are worthy documents to read during the flight.

    Recent Trends In International Trade
    WTO World Trade Report 2005
    http://www.wto.org/english/res_e/booksp_e/anrep_e/wtr05-1a_e.pdf

    World Merchandise Trade by Region and Selected Country, 2004
    (see Appendix Table 1)
    WTO World Trade Report 2005
    http://www.wto.org/english/res_e/booksp_e/anrep_e/wtr05-1b_e.pdf

    World Trade of Commercial Services by Region and Selected Country, 2004
    (see Appendix Table 2)
    WTO Trade Report 2005
    http://www.wto.org/english/res_e/booksp_e/anrep_e/wtr05-1b_e.pdf

    Global Tariff Profiles
    WTO World Trade Report 2005
    http://www.wto.org/english/res_e/booksp_e/anrep_e/wtr05-tariff_e.pdf

    Country Trade Analysis – two links
    http://www.intracen.org/mas/country.htm

    http://www.intracen.org/countries/

    ** These One-Stop-Shop links for individual country economic data represent virtually everything one would want to know. Select a country. Explore. Import and export growth can be analyzed by product group. Hard to beat this source of information.

    ……

    The refuel is finished, the pilot tells us. Only picked up a partial load of fuel, unfortunately. Problem with the coupling device. We’ll try to refuel with the next tanker. At night. That’s dangerous, but the pilots have no choice. Think I’ll take a nap. And dream about the future. Wherever that may be.

    The party is raging on up in First Class. It’s rowdy. Here’s hoping that they calm down and sleep it off before the senior pilot has to waste precious fuel and make an emergency landing to kick some of them off. One hero came back here a few hours ago. Started yelling, “There is no future! There’s just today!! Let’s party!” That upset the kids. And those of us who were awake. I won’t shed a tear if the pilots throw that guy off. And he is a transnational corporate CEO.

    The flight attendant is pouring more champagne in First Class. Must have cases of it. Probably more down in cargo hold.

    Still no peanuts…

  • Posted by touche

    I think investors are obsessing too much about the US economy. In the past, the fate of consumers and investors in the US was tied together. But with globalization, no more. The American consumer is doomed by skyrocketing debt and more competitive labor markets overseas, so its time for investors and their advisors to move on.

    I think China, India, the rest of Asia and countries rich in natural resources will all do well on their own even as the old industrialized countries decline.

  • Posted by Steven M

    Hi Touche. The reason we are obsessing about the US economy is, that’s where the problems are. Yes globalization means other economies doing well. However, if one effect of globalization is that in my own country, all the jobs dry up and all the factories close, then clearly something is wrong. I understand that globalization in other countries is working, but if it’s hurting my country, I have to respond to my country’s concerns first.

  • Posted by touche

    Steve, there’s not much we can do to help the US economy, so we shouldn’t obsess about it. I think investment advisors would best serve their clients by focusing on opportunities rather than dwelling on a hopeless failure.

  • Posted by Steven M

    Hi Touche. I am not an investment advisor. I have no problem with those who see this from that point of view. All I’m saying is that my own personal approach hinges on what I need to do as a citize. I understand that people in this forum have many different approaches and roles in this issue. I am simply explaining my own personal role.

    As far as whether the economy is a failure, that is not the issue. The issue is what we can and need to do as a country, to provide opportunity for all. That is an obligation of any country, regardless of economic conditions.

  • Posted by sun bin

    I guess if China can use project finance to raise money against the specific project, then it won’t eat into its budget. But I think China’s priority lies in areas where not necessarily solvable by money alone, e.g. bank system, privatization (incl the banks), etc. i.e. to create an environment where money spending decision is accounted for by the collective wisdom of the market (vs a few brains in power).

    As to the problem in US. I don’t know whether throwing $1bn+ into a pit in mesopotamia is a better way to spend money than buying clothes in Walmart, the clothes gets you warm at least…
    one of the differences between Clinton and W is probably Clinton had the luxury of spending less on the defense industry.

  • Posted by bsetser

    The US has not done a great job of generating broad based real wage increases (see Delong and the Angry bear), nor can it export close to enough to pay for all it imports.

    The US, however, has not been a “hopeless failure” when it comes to generating strong consumption growth; there, the “hopeless failure” is the rest of the world.

    We are all in this together, like it or not.

    If the US is a hopeless failure, the $11 trillion in (gross) foreign investment in the US won’t be worth very much.

    and if the rest of the world does not shift the basis of its growth toward domestic demand, the US will have to try to export its way out of a big hole in a very difficult environment marked by slow global growth, and that won’t be good for anyone.

  • Posted by progrolib

    Brad – many thanks for giving me a clue that Jeff Frankel has a paper on this issue. My Angrybear post links to this very good paper – and them relates it to the debate between Nouriel and David Altig – where the latter is mistaking forward rate evidence with evidence of undervaluation.

  • Posted by sun bin

    PC (and others),

    I don’t think anyone is pretending to be a China expert here. I have been to the rural home and to almost a hundred Chinese cities of different sizes, but i don’t claim to know China rural. I think Chongqing is a good sample for inland cities which is just starting to take off.

    I guess Brad has his vision and idea of the purpose for this forum here. For me it is to exchange idea and learn from each other, as would for any academic discussion. So that one can also choose which comment to read, to reply to, or to ignore.

  • Posted by Anonymous

    Brad Sester writes:

    “I suspect the the blog format is better suited to making a few direct points per post, not trying to cover the world.”

    Brad DeLong writes:

    “Brad Setser Has Lots to Say–All of It Interesting”

    http://www.j-bradford-delong.net/movable_type/2005-3_archives/001190.html

  • Posted by touche

    “If the US is a hopeless failure, the $11 trillion in (gross) foreign investment in the US won’t be worth very much.”

    A miracle is not going to happen just because we need one. Why beat a dead horse?

  • Posted by Movie Guy

    Sun bin,

    Well, I hope that you didn’t mind my airplane flight into the future…

    A good analogy I thought. As do friends.

  • Posted by Steven M

    In my opinion, the US needs to learn to do a few things which China does very well. One is to pump some genuine resources into research, and industrial development. Another is to have good science and math training. Another is to have a population focused on the “boring” details of actually achieving the nation’s economic goals.

    By the way, folks, there is another scenario. If our currency really declined in value, or our economy really deteriorated, etc etc, then we might need to start buying domestically only, simply because that’s often how nations get themselves out of an economic hole. You buy only domestically, to preserve your domestic economy.

    I don’t expect us to reach that point. But it’s worth remembering that when nations disregard their most basic economic foundations, the ultimate remedy is to have an economy which only uses domestic businesses. That’s how some nations build their wealth, or deal with some types of adversity. I don’t believe we’ll need that, but it’s worth remembering.

  • Posted by sunbin

    Movie guy,

    You airplane story is fun to read :)

    The chance is that someone in Coach will be thrown off before the CEO. But it doesn’t matter if your half-filled fuel tank won’t sustain you across the ocean.

    However, there is also an analogy that China/India are travelling by sail-boats and were crazy storing food for their long trip…

  • Posted by Movie Guy

    Sun bin,

    I like that.

    Of course, had I used a boat analogy, it would have had a 454 cubic inch engine, not enough life preservers, food, or sunscreen. ha.

  • Posted by Movie Guy

    Brad,

    We could be in worse shape. I’ve seen tougher situations in my business experiences. And we turned it, setting records in the process. It’s all a function of teamwork and a “we” attitude, plus some brainpower. The attitude that I see missing at the higher U.S. corporate levels with regard to the welfare of the nation concerns me. Their families’ nation, by the way.

    We’re not fully in the danger zone yet. I believe that we can turn this around. The effort will require broader thinking and more effective consultation with key domestic industry groups. The problems go beyond the numbers, as there are key principles being ignored.

  • Posted by Steven M

    Movie Guy, I totally agree. Hope you will elaborate on these ideas in the near future.

  • Posted by Movie Guy

    Brad:

    “The US has not done a great job of generating broad based real wage increases (see Delong and the Angry bear), nor can it export close to enough to pay for all it imports.”

    Lower than hoped for wages represent a difficult situation, driven by a number of factors. Not the least of which include some foreign sector competition, rising health care costs, and stronger retention of profit share by companies and corporations.

    U.S. exports are growing reasonable well, but not as strongly as U.S. imports. The spread appears to be holding, not increasing. That’s a good sign. On the other hand, U.S. exports are losing percentage share of all global exports to each region. I’m not sure that there is much that can be done about that situation without dollar revaluation.
    —–

    “The US, however, has not been a “hopeless failure” when it comes to generating strong consumption growth; there, the “hopeless failure” is the rest of the world.”

    I believe that you may want to study this a bit more.

    World merchandise trade (MT):

    A quick review of Appendix Table 1 in the WTO reference I posted above shows clearly that global export growth by all economic regions soared in double digit growth for 2003 and 2004. I expect that pattern is continuing in large measure in most regions during 2005. In fact, double digit world export growth of 17% in 2003, and 21% in 2004. Strong moves, as part of the global recovery.

    U.S. export growth (MT) was 13% in 2004, accompanied by import growth (MT) of 17%. U.S. export and import growth percentage fell under the global average.

    World commercial services trade (CST):

    Appendix Table 2 reflects global export growth of 13% for 2003, and 16% for 2004.

    U.S. export growth (CST) was 11% in 2004, accompanied by import growth (CST) of 13%. Both U.S. figures fall below the global average of 16% for 2004 imports and exports. The U.S. lagged further behind global averages for exports and imports in 2003 at 5% and 8% compared to 13% and 14% for global averages.
    —–

    “We are all in this together, like it or not.”

    Agreed. Though I don’t believe that all nations share that perspective.

    I wouldn’t, though, eliminate future considerations of initiatives that may influence the redirecting of future Foreign Direct Investments (FDI). As well as other potential trade imbalance actions by region or country.

    Moreover, there is a strong likelihood if not an essential need that the Office of the U.S. Trade Representative (USTR) should be restructured around a hands on ambassador post affording it proper stature in the global community of nations. I knew the U.S. Counsel General in Bordeaux, France when I lived nearby, and I never displayed disrespect for his title or position. The U.S. government couldn’t employ me to be the nation’s trade representative, though I could readily handle the position and its responsibilities. I would, though, consider an ambassadorship, the President’s Ambassador on Trade Negotiations, if such position existed. The need is obvious, internally and externally. The Bush administration lacks sufficient respect for the operation as well.

    —–

    “If the US is a hopeless failure, the $11 trillion in (gross) foreign investment in the US won’t be worth very much.”

    A nice figure. Let’s hope that continues to grow, but not at the expense of some developing countries and regions presently losing valuable FDI to the disproportional FDI flows rolling into China.
    —–

    “and if the rest of the world does not shift the basis of its growth toward domestic demand, the US will have to try to export its way out of a big hole in a very difficult environment marked by slow global growth, and that won’t be good for anyone.”

    Not slow global growth, as discussed above. Rather, growing global export competition, coupled with economies not mirrored in the U.S. model of growth based on extensive and perhaps overly large lines of consumer credit.

    The U.S. will have a difficult time digging out of the current account hole as long as global export competition continues to increase based in part on the further lowering of trade barriers through WTO rules and improving efficiencies of other trading partners. The U.S. would benefit immensely with the development of newly discovered or implemented technologies, as long as such technologies are not readily transferred to foreign interests by U.S. corporate interests. General Motors, for example, holds the key to some forthcoming critical technologies. More than any other global auto manufacturer, but that’s all that I am willing to share.

    It is very clear that U.S. corporate interests have been given the green light by Washington to expand offshore productions at the expense of domestic investments designed to improve existing process flow and other actual production efficiencies (not overtime). This open floodwater gate should be tightened, providing appropriate incentives for U.S. corporations and U.S. FDI interests to expand investments in U.S. domestic plant production.
    —–

    Trade data source:

    http://www.wto.org/english/res_e/booksp_e/anrep_e/wtr05-1b_e.pdf

  • Posted by bsetser

    Movie Guy — are the world goods trade data that you mention in dollars, or have they in some other “real” unit. i mention this for two reasons. in 03/04 the change in the euro/$ dramatically increased the “dollar” value of intra-european trade, as well as trade between say the UK and Germany, or Germany and Turkey. I know the turkey numbers particularly well, and their dollar trade just went through the roof. Also, the value of oil trade went way, way up in dollar terms — more so than the volume increase. that also generated more imports, in volume (real) as well as nominal (dollar) terms –

    finally, the east asian data, on both the us and east asian side, suggests a significant slowdown in global trade growth this year. China excepted. Look at korea, taiwan, others tho. european export growth also has pretty clearly slowed …

  • Posted by Steven M

    Movie Guy, thanks for your great post. I disagree with some points, and agree with others.

    U.S. exports are losing percentage share of all global exports to each region. I’m not sure that there is much that can be done about that situation without dollar revaluation.

    I don’t totally agree with this. I believe there are innovative things we can do to correct this. They require effort and resources, but that’s what comes with anything worthwhile. However, I feel this exact viewpoint is upheld by your later comments, such as:

    [paraphrased]
    “It will be hard for the US to get out of the current account hole if competition is based on…lowering of trade barriers through WTO rules and improving efficiencies of other trading partners. The U.S. would benefit immensely with the development of newly discovered or implemented technologies, as long as such technologies are not readily transferred to foreign interests by U.S. corporate interests. General Motors, for example, holds the key to some forthcoming critical technologies.”

    I agree completely with this. This should be the focus of a unified national economic effort. This is an example of the ideas a nation can use, once it stops being passive, and starts to apply its real strengths towards real goals.

    My point is that we need a new attitude in this country, one which stresses common effort to reach real economic strength, instead of passive reliance on foreign capital, which comes in mainly because of our ability to consume, and not because of any skill or superiority which we offer. This can change, if we start to build on our real strengths, and to work together to foster innovation and business development.

  • Posted by Stormy

    Absolutely great post, movieguy. The story was great, too.

  • Posted by Movie Guy

    Brad: “are the world goods trade data that you mention in dollars, or have they in some other “real” unit. i mention this for two reasons. in 03/04 the change in the euro/$ dramatically increased the “dollar” value of intra-european trade, as well as trade between say the UK and Germany, or Germany and Turkey.”

    The link that I provided at the bottom of the post takes one to the section of the WTO World Trade Report 2005 containing the two tables. (So indicated on the right or left column margin of each page.)

    Both WTO tables state that all monetary values are expressed in billions of dollars. The percentages represent percentages of those dollar values.

    LINK:

    http://www.wto.org/english/res_e/booksp_e/anrep_e/wtr05-1b_e.pdf

    This report was released recently. Therefore, it is logical that WTO had more than adequate time to properly adjust all tabulated values for 2003 and 2004 based on the currency values of the currencies rolled over to dollars for the annual periods reflected in the tables.

    Perhaps you should raise your questions with WTO in Geneva, SW should you doubt the accuracy of the dollar values expressed in the report.

    The data was provided in WTO’s annual trade report. I have no expectation that the data should be inaccurate.

    ——

    I understand that Taiwan exports are bleeding. And that Asian crude oil consumption is declining slightly or is projected to decline. I would assume, though, that Asian regional exports driven by current market gains of China’s exports may wash the losses of the other Asian nations referenced in WTO’s index.

    Secondly, China and perhaps some other nations in Asia should be strong export performers during this quarter if the economies of the North America and EU 25 fulfill normal fall/holiday sales demand. That consideration, though, overlooks any meaningful detailed analysis of Asian economic performance on a by nation basis.

    I haven’t taken the deep look.

    What are you for current information data sources on Asian nations?

  • Posted by bsetser

    i do not doubt the accuracy of the dollar values – i just wanted to note that the dollar value of “euro” denominated trade rose without any increase in the “euro” trade because of the euro/$.

    as for data on asia, i tend to use the BOP data most central banks publish on their web pages.

  • Posted by Movie Guy

    Steven M,

    I have read your posts with pleasure. You’re on target. Your last post cuts to the chase.

    Let me share the following as a fairness disclaimer for any future remarks on the subjects you have raised. Polite kindness first, based on a lack of factual knowledge on my part.

    I can’t say with any authority what the current administration is or isn’t doing on such specific issues as we have addressed. There wouldn’t be much point in my criticizing the administration harshly without knowing the facts. Conversely, it would be good to know more if the information is available for public consumption. That is not to say that some web site links or news releases haven’t been issued on such matters. I can’t recall any at the moment, but that could be my lack of focused recollection.

    I have spent considerable time researching the Department of Commerce during various periods in the past few years. I have never been as impressed with that web site under any of the recent administrations. The promotional fluff is there, as would be expected. That’s part of the department’s cheerleading job.

    There is a separate Export.gov web site or however it is identified. That site has potential. Hopefully, U.S. exporters are taking full advantage of the Commerce Department’s initiatives including funding support sources.

    There is a search method by which an individual can access by-state export data. Specific data. I believe Export.gov has the feature. I was surprised the first time I toured the by-state site. The U.S. is exporting plenty of goods and the spread across the states appears reasonably excellent. Impressive is a better description. I was pleasantly surprised a number of times.
    —-

    Your ideas have considerable merit and deserve serious review. If Commerce isn’t pursuing such dialogues, or recommending such to a Presidential commission, or the President, then the matters should be raised to the Congress or the Administration. And in depth in blogland.

    Your summary is excellent — “My point is that we need a new attitude in this country, one which stresses common effort to reach real economic strength, instead of passive reliance on foreign capital, which comes in mainly because of our ability to consume, and not because of any skill or superiority which we offer. This can change, if we start to build on our real strengths, and to work together to foster innovation and business development.”

    We do need a new attitude regarding our economic vision. From the national leadership down to the individual household in my opinion. Back to basics wouldn’t hurt, too. Sound basics, that is.

    Well stated, Steven.

  • Posted by Movie Guy

    Brad,

    Excellent point.

    Thanks for the source info.

  • Posted by DOR

    brad,

    China isn’t trying to control inflation (despite what I implied), but to prevent deflation. Revaluation is risky on that consideration.

    PRC CPI Quarterly Averages
    year-on-year percent change

    Q-1 2004 _ +2.77%
    Q-2 2004 _ +4.40%
    Q-3 2004 _ +5.27%
    Q-4 2004 _ +3.17%
    Q-1 2005 _ +2.83%
    Q-2 2005 _ +1.73%

    On PPP, I’m having trouble with the logic that it doesn’t provide a good guide for the market exchange rate for an emerging economy, yet can be used to determine that China’s market exchange rate is low relative to the inappropriate PPP rate.

    PPP is a measure of comparative domesitc prices. If we exclude trade and investment flows from China’s GDP, what would the PPP rate be?

    Steven M,

    Calling China a communist country makes about as much sense as calling Singapore a capitalist country.

    Movie Guy,

    Taiwan’s exports were up 20.7% in 2004. Granted, they slowed to 6.9% year-on-year in the first half of this year, but that’s on top of 25.6% year-on-year growth in Jan-Jun 2004. More important, it only measures products made in Taiwan, not products made by Taiwan-owned facilities abroad.
    .

  • Posted by Movie Guy

    Thanks, DOR

    Hope all is well on your end.

  • Posted by Steven M

    Hi Movie Guy. Just wanted to write to say thanks for your encouraging comments. I have some other thoughts on this, which I hope to bring up a little later. But I just wanted to write, to say thanks for your helpful comments. It’s nice to hear from someone with some good feedback. See you.

    Steve

  • Posted by Steven M

    Hi Dor. I did call China a communist country. That is because that is what they are. It was not meant as invective, or anything else.

    I am interested in your comments, but I’m not sure what you meant. If you mean that China has achieved big capitalist and business achievements, that’s correct. There are a few ways they were able to do this. One was through simple innovation and hard work. Another was that they have set up free-enterprise zones along their east coast.

    Another major factor is by pumping billions of dollars into research, and into investments in their own domestic industries. This shows one form of using public, national resources to reach private economic goals. The use of central planning for economic goals is a major part of communist theory.

    You may say that the way they did this was actually quite positive, and would fit well with capitalist society. That’s precisely the point; maybe it would. But understanding their ability to do this so effectively requires us to understand their underlying system. We can then judge for ourselves which of their ideas are positive, and which aren’t. It also requires us to understand the many strengths of our own system and our own society.

  • Posted by sunbin

    http://en.wikipedia.org/wiki/Communism

    Communism is an ideology without currency or private property. In that definintion, not even the old China (think North Korea today), Cube or old USSR are communist countries, they are at best “socialist countries on the way to a communist dream” in their own words.

    Another definition is under Comintern where its objective is to spread communism to the whole world (without that, they cannot abandan private property and currencies in isolation).

    In neither definition China is a communist country. But you can call China “a country ruled by an authorative single party”, which call itself a communist party.

    i agree with DOR’s comparison with Singapore.

  • Posted by sunbin

    “The use of central planning for economic goals” were widely used by Japan, S Korea, Taiwan, and esp. Singapore. All of them totally anti-communist.

    In fact, the success of China in the past 27 years was because they copied US and western (capitalistic) approach, DESPITE that feet-dragging of central planning legacy.

  • Posted by DOR

    Steve M,

    Thanks for your comments.

    China achieved unprecedented improvements in raising standards of living for 1/5th of the world’s population through deregulation and decentralization. The business aspect was a sideshow compared to the rise in caloric intake, literacy and longevity.

    The first step, back in the 1970s, was to let farmers sell surplus, from their personal gardens, in the cities. The increase in incomes was so startling that people actually left the cities to go work on the farms. That set the foundations in place for the urban takeoff in the following decade.

    By “pumping billions of dollars into research”, are you referring to foreign investment? I think that must be the case, since there really wasn’t much of a boom in SOE investment in the 1980s and 1990s.

    As for state planning, that died out long ago (at least in China). The March 1998 reorganization saw the elimination of the electric power, coal, metallurgical industry, machine-building industry, electronics, and chemical ministries. The State Planning Commission was renamed (twice) and is now the State Development Planning and Reform Commission, and it has a whole new agenda.

    In short, China over the last 25 years did everything the West asked it to do to change its economic policies.
    .

  • Posted by Movie Guy

    sunbin,

    As you know, the CIA still calls China a communist state.

    I have read your blog. So, I have some appreciation for your views and observations. Many of which I agree with and others that I appreciate.

    China, though, is not a democracy. Its leaders are not elected freely by the general population. Its citizens do not determine the laws under which they live by method of voting for officials, free of “party” or gang restrictions.

    It’s not a socialist democracy. Again, no elections of its national leaders by the general population. And so on.

    Many different forms of national government, including dictatorships and communism, can achieve economic success under a well balanced plan. And any national government can employ capitalism as an economic tool.

    If China is not a communist state, then it most certainly is a nation of 1.3 plus billion people ruled by a dictatorship or fascist party of citizens. Ruled by a gang if you will. Their way or no way.

    The controlling party/government is opposed to free speech as evidenced by its mining/blocking of information following across the internet in China.

    Yes, China is improving. But the same master party runs the nation.

    I’ll cheer loudly for China when its people are completely free to vote for their elected officials at all levels of government, and have the legal right to vote them out of office a few years later.

    Meanwhile, mainland China has a growing number of missiles pointed at Taiwan. The very people that the ruling party in China doesnt’ want to have free voice in determining their own future.

    I say remove the missiles.

    Taiwan is no threat to China. Unless China is afraid of its model as a nation and society.

    Huge China afraid of Taiwan… That doesn’t make sense unless it is afraid of its ideology.

    What ideology could China be worried about at the national party/government level?

    Freedom? Democracy? Things like that?

    If there is no fear of democracy, then China’s national government needs to embrace freedom and democracy. Let power transfer to the voting booth in small but reassuring increments. Or step out of the way now, and let the 1.3 billion plus people vote their hearts and minds.

  • Posted by sunbin

    Movie Guy,

    Thanks for your comment. I am also flattered that my blog was read :).

    I do not think we disagree in terms of substance. I do not dispute the fact that China is not democratic. I call it authoritative, but the difference from dictatorship is not too big. So we agree there.
    (Although i wouldn’t use the word fascist — which is reserved for the italy and japan in 1930-1945)

    The difference between China and Marcos’ Phillipines, Most of South America, Mahatir’s Malaysis or Park’s S Korea is a lot less than what China differ from USSR, Cuba or N Korea.

    I don’t care what CIA’s definition is. I don’t even know if they have a proper definition for ‘communism’. e.g., Oppenheimer, who headed the Mahattan Project, was labeled as a communist.

    All I want to clarify is that dictatorship and communism are very different concepts. Some people in US equate communism with evil, but among the intellectual communism is also viewed as an ideal Utopia. I think associating either concept with China is very misleading.

    As for Taiwan, I don’t want to go into the debate of that. I deeply believe the Taiwanese people should have their own choice and their independence does not harm people in either side of the strait. However, I should note that mainland China has a point in comparing with American Civil War in 1865. The Conferate pose no threat to and had absolutely no intention to invade the Union.

  • Posted by Steven M

    Hi folks. Thanks for your comments. I agree with the viewpoint which says that China is a communist dictatorship. That doesn’t mean they haven’t had major reforms, or major concessions of freedom. The point is whether the underlying power is vested in communist forms of power and policy-making.

    For me, the crucial question in identifying communism is, is there an unconditional right to private property, and do individuals have power versus the state.

    Yes, you cou could make a case that those are issues in the US too. But all I am saying is that those are the areas to look for the key evidence, in order to identify a state’s underlying ideology and intrinsic differences. Otherwise, you could simply blur all distinctions; but these are still valid and important distinctions.

    Sunbin, that is true, Japan, Singapore, etc, have used central planning. I didn’t mean to imply that no democracies have used central planning. I only meant that if you do want to find aspects of communist methods in China, they are there, whether in more benign form or more malicious one.

    As far as pumping billions into industries, I simply meant that many industries are state-subsidized. I’m not saying that is so bad; as I’ve said, I think we need a little more national/public investment in key US industries here.

    Dor, you make some good points. As far as China’s economic reforms, not only did it do what the West asked it do, those reforms are enabling it to outpace the West. Good plan of ours, to demand reforms so that our competitors can outrace us. Oh well.