Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

Print Print Cite Cite
Style: MLA APA Chicago Close


So, does China export oil?

by Brad Setser
August 21, 2006

I challenge anyone who doesn’t know that China is an oil importer to find a way of distinguishing China’s current account surplus from those of the major oil exporting regions.   You almost would think from looking at a graph of China’s current account surplus against those of the big oil exporters that China exports oil.



To me, the fact that China’s current account surplus has soared even as oil and commodity prices have soared is one of the great puzzles of the world economy.  

It is related to another puzzle.  China has had one of the world’s all time great investment booms, a boom that has raised investment from around 40% of China’s GDP to around 50% of China’s GDP.  That boom is one reason why commodity prices have soared.  Investment booms usually generate current account deficits.  But in China’s case, the investment boom has coincided with an even bigger savings boom – so savings has grown even more than investment.

The results of this show up clearly in the US data.   The US is – in a global sense – the counterparty to both the oil exporters’ surplus and China’s surplus.    I plotted the US bilateral balance (a rolling four quarter sum) with the main Asian economies and the US bilateral balance with the countries that export oil to the US – oil exporting Asia, Venezuela and Africa in the US data.  The US also imports oil from Canada and Mexico, but it also imports a lot of manufactured goods from its NAFTA partners.   So I left them out of the picture.

Be forewarned, the scales are different.  But the basic picture is clear – the US bilateral deficit with both Asia and oil exporters has risen sharply.    And please, after looking at this picture can we all dispense with the now very dated argument that the United States soaring deficit with China just reflects shifts in production inside Asia.   That was arguably true through 2003, but the United States overall deficit with Asia – not just its deficit with China – has soared since then.  Look at the blue line.



A higher oil import bill should mean less for other goods.  But not for US.  At least not from 2002 through the first quarter of 2006… the US, as we all know, has borrowed to buy more of everything.     

Helped on by a big credit line from – you guessed it, China and the world’s oil exporters.

The global equilibrium, in a nutshell.

(p.s. this graph doesn’t include q2 data.    But it is clear that the growth in imports from Asia is slowing, while the US oil import bill is still growing – so the close correlation may be breaking down, just a bit.   The beginning of this shift already shows in the changing slope of the Asian curve)


  • Posted by ABC

    Sorry Brad, but I think Dave Chiang is right. This has to do with the dollar. Look at the M3 figures. I think you are essentially looking at inflation in the dollar economy. M3 has increased 70% from Q4 2000 to Q4 2005. Over the same period using the stats on your graph deficits with oil producers has risen roughly 48% whilst the trade deficit with asia has risen roughly 65%. That the pattern correlates is not really that much of a surprise. I don’t know if it’s the dollar value of Asian goods that has increased or the quantity of Asian goods that has increased, or maybe a mixture of both. But I would suggest more the dollar value. Maybe I should say price instead of value there.

  • Posted by Stormy

    “And please, after looking at this picture can we all dispense with the now very dated argument that the United States soaring deficit with China just reflects shifts in production inside Asia. That was arguably true through 2003, but the United States overall deficit with Asia – not just its deficit with China – has soared since then.”

    Well,unless I am mistaken, you put the shackles on possible arguments. I am not quite sure why it not even more the case now. But I will just watch for the sidelines. Sorry for the intrusion.

  • Posted by MTC

    Dr. Setser –

    In tandem with the triangular trade between Japan (high value-added components), Continental Asia (assembly and low value-added components) and the United States (consumption), there has to be a reverse triangular flow of dollars. Are not Chinese commercial banks, instead of exchanging their dollars for yuan bonds from the PBOC, just forwarding most of the dollars they accrue in their accounts to Japan, Taiwan, South Korea and the energy producers?

    A thunderously stupid question–but is there any measure of the flows of unconverted dollars between the world’s commercial entities?

    I am trying to dispel myself of a vague sense of the existence a dollarized transnational economy hovering above the national economies. The movements of dollars through the transnational economy show up in the trade statistics but are only mirages–only a fraction of the dollars are actually entering or exiting the non-dollar national economies. Instead, the vast majority of dollars are just being passed around unconverted between the divisions of multinationals, the commercial banks and the finance divisions of the oil producers like hot potatoes.

    Again, I apologize for what is most likely a thunderously stupid question.

  • Posted by Dave Chiang

    Hi Brad,

    Slightly off-topic comment, but the hyperlinked article by Eric Teo Chu Cheow addresses the growing Bush Administration insecurity about China’s rising Economic power. The Washington Consensus has never been terribly concerned over the US Industrial technology base erosion to Japan or even China. A senior researcher at the Brookings Institute Think Tank in Washington DC admits that what really concerns the Wall Street-Treasury complex would be the loss of US Dollar hegemony. When China becomes the center of world trade, financial services would shift from New York to Hong Kong or Shanghai. The US business and financial community’s concern is based on this premise.

    ” A senior researcher at Brookings asserted that the US would lose out if and when China becomes the center of Asian trade, as this would result in huge losses for the US financial center: every financial transaction of US$100 in international currency trading in the US results today in at least a US$3 commission for US banks. According to him, if China should become the center of trade in Asia, financial services could shift from the United States, resulting in net job losses for its financial services sector and make a decisive dent in US GDP, of which financial services constitute some 22 percent.

    The US business and financial community’s concern is based on this premise, especially when the twin deficits in the US have hit an all-time high and are likely to continue to rise. Meanwhile, concerns are growing over how the US is becoming more dependent on China’s “financial largesse” in terms of the latter’s expanding international financial clout and the US Treasuries that Beijing buys. US concerns are magnified by the bursting of the housing bubble and rumors of further interest rate hikes, thanks to the current weak dollar. ”


  • Posted by STS

    Dave Chiang:

    Thanks for the link. I wonder if the author heard these concerns from anyone the Administration actually listens to. We can hope.


    The idea that we’re looking at inflation in the “dollar zone” is plausible to me, but I’m not sure it would square with conventional definitions. It’s a bit like China’s willingness to bid ever lower on labor costs (both in nominal terms and by their support of the dollar) represents a growth in available real resources (ever more labor for the same dollars) which in turn elicits (via PBoC purchase of Treasuries/agencies moderating interest rates in the US) more credit and consumption without quite being fully reflected in strict *price* inflation. (Core inflation really isn’t amazingly high by historical standards.) So yes, much bigger money supply as the “dollar zone” expands, but the extra dollars are bringing more labor online rather than just circulating faster.

    But *title* to a lot of those new dollars belongs to China (and other parts of the larger dollar zone) while Americans just borrow and spend them.

    I’ve just been reading about the role of tariffs in the growth of the US economy in the latter part of the 19th century. It looks to me like China has invented a better model of development than we used in the US. I’m guessing this is because the level of wages in the US wasn’t so dramatically lower than in Europe, so it wasn’t possible to rig up the kind of partnerships China uses with US/European companies. On the other hand it could just be the differences in governance. It’s hard to imagine the US government (of any period) directing economic development so purposefully.

  • Posted by HK

    Dave–I don’t think Americans are so much concerned about the Chinese economic (financial?) power, though they are worried about China’s rising military power. Why? Because, economic affairs are frequently in a win-win game situation (the US economy is benefiting from China’s rapid economic growth), and what matters is efficiency and productivity (per capita income) rather than total GDP, while military power is basically in a zero-sum game situation and directly proportional to total GDP. By 2050, China’s total GDP would become much larger than the US GDP, and the US military hegemony might be in danger. Howver, even then, the US economy is likely to maintain the highest productivity, many times higher than the Chinese economy.

    “Financial power” supposedly based on a large current account surplus and accumulated foreign assets is largely an illusion; look at Germany, Japan, Taiwan, or Singapore. China is not an exception, though it could become a formidable military power in the next few decades. Saudi Arabia has some economic power, not because of its accumulated foreign assets, but because of its vast oil reserves. And the “dollar hegemony” is supported more by the superb financial sector efficiecy and the macroeconomic stability than by current account surplus or accumulated foreign assets (which are negative in the case of the US).

  • Posted by Movie Guy

    Brad – “And please, after looking at this picture can we all dispense with the now very dated argument that the United States soaring deficit with China just reflects shifts in production inside Asia. That was arguably true through 2003, but the United States overall deficit with Asia – not just its deficit with China – has soared since then.”

    Study the currency valuations of the Asian Tigers during the same period.

    Now, compare what we export to Asia and what Asia exports to the USA. Which pile of stuff (goods) would we find more of in an average household or office, whether in Asia or the USA? The answer is obvious, as is the answer regarding currency valuations.

    That computer on your desk was manufactured where? And that television set? Your cell phone? Office equipment? Computer disks? Lamp? Just look around the room.

    Come on, Brad. Mix of goods. Currency valuations. The game is still in play. All over Asia.

    If you want to strip out household consumer goods and office products/goods, we might have an argument worth pursuing. But not otherwise. We don’t make the consumer and office goods. Asia does. Where the hell else will you source it as a buyer?

  • Posted by MrSel

    Wouldn’t it be possible to explain the oil exporting countries current account surplus as a consequence of China’s economy – at least partially?

    China’s economy is producing more and more industrial goods. This has two main consequences: 1/ a good share of those goods are exported, thus contributing to the Chinese current account surplus and 2/ to produce those goods, China is demanding more and more energy, boosting both price and production capacity of oil exporting countries.

    Thus, the more China is going to export industrial goods, the more oil producing countries will witness a growth in current account surplus.

    According to that point of view, a growth in Chinese current account surplus will be accompanied by a comparable growth in oil exporting countries, at least on a short term perspective.

  • Posted by Guest

    Looking at the topic and this in today’s BBC: “…Chile is an ideal free-trade partner for Beijing, as while China is now the world’s biggest consumer of copper, Chile is the largest producer of the metal… The treaty will free 92% of Chile’s exports to China from customs tariffs, and remove Chilean tariffs on 50% of China’s exports… Chilean exports to China totalled $4.6bn (£2.4bn) last year, while those moving in the other direction amounted to $2.5bn…”

    So much text is dedicated to the China-U.S. relationship, might it be appropriate to take a closer look at China’s (rapidly?) evolving relationships with key commodity exporting nations?

  • Posted by Dave Chiang

    Reply to HK,

    The structural economic advantage that the US enjoys is derived from the globalization of market fundamentalism based on dollar hegemony. Dollar hegemony depends on the dollar being fully fungible, i.e., able to buy anything in the market without conditionality. And the nature of dollar hegemony is that the US and only the US can print dollars at will. The Chinese and other Asian economic powers need to acquire US dollars for the purchase of strategic commodities especially oil. The Bush Administration invasion and control of Iraqi oil resources can be deemed a strategic success by maintaining the dominance of the US Dollar in the Middle East energy trade. While the Chinese PLA has modernized considerably in the past decade, the military lacks the logistical capability for long range strike to challenge the US military hegemony over Middle East energy resources.


  • Posted by Dave Chiang

    PS. One more comment. The Bush Administration invasion and control of Iraqi oil resources can be deemed a strategic success by maintaining the dominance of the US Dollar in the Middle East energy trade. Immediately after the successful invasion of Iraq by the Bush Administration, the Iraqi Ministry of Energy announced that Oil exports would no longer be denominated in Euros or yen, but only in US dollars. The Ministry of Energy building complex was the first Iraqi government agency to be secured by the US Army under the direct orders of the Bush Administration.

  • Posted by Gcs

    god love all you who believe
    the threat to the dollar
    as hegemonic tender for oil
    got us shooting our way into iraq

    the only uncle sam advantage
    as things stand now
    is precisely measured
    by the sizeand growth rate
    of the reserves held in dollars
    by the rest of the planet

    why one would stop
    holding reserves
    in dollars simply
    because now u buy oil
    in euros escapes me
    thats what forex markets are
    actually for
    so you can hold your reserves
    in any currency you choose

    despite the spec vamps
    who dominate the action
    distort it and imo (as a former spec)
    help unintentionally
    to turn it into a north south tilt table
    for the trans nats benefit

    and even more unimportant
    is the conventional
    price quote in dollars
    and as
    to the fate
    of long range contracts set in dollars
    versus any other currency
    stronger or weaker
    either way one party or other
    “loses”only because of a risk
    that is systemic, emergent ,
    and unavoidable

    quoting in swiss francs or gold ounces
    would serve no better

  • Posted by Guest

    “…In Southeast Asia, water-related tensions arise from attempts by the six riparian states (Cambodia, China, Laos, Myanmar, Thailand, and Vietnam) to construct dams in order to reroute the Mekong River system. While management systems have been established for these disputes… they have been poorly enforced. Furthermore, all three regions are plagued by long-standing historical animosities and internal instabilities and water disputes serve to focus these tensions. The fact that these river systems run through multiple countries — notably the Aral Sea, Ganges-Brahmaputra-Meghna and Mekong Rivers are each shared by at least five states — creates the potential for regional conflict over water… While international attention on Central Asia has tended to focus on its oil and gas reserves and its role in the war on terrorism, the region is also home to several long-standing water disputes, which have the potential to escalate the region’s instabilities…” Asia’s Coming Water Wars,

  • Posted by HK

    Dave–I really don’t think the fact that oil prices are quoted in the dollar is a firm foundation of the “dollar hegemony” of any sort. You can easily exchange the euro or the yen into the dollar and purchase oil at any time, and oil producers can invest in the euro or the yen assets by exchanging the dollar receit into the euro or the yen.

    The fact that the dollar is widely used as the unit of account (denominator), means of exchange, and means of savings can be characterized as the “dollar hegemony.” But it is a complicated, self-reinforcing mechanism based on the efficient financial system, stable macroeconomic conditions, safe haven status, wide involvement in international trade and investment, large domestic market, military strength, technological superiority, and historical heritage. (Remember that the pound stirling was the most used international currency until early 1950s, well after the UK had lost almost everything to the US after World War I.)

    Therefore, I don’t think Americans are worried about the possibility of loosing the “dollar hegemony” to the renminbi simply because China becomes to have big current account surplus and accumulate huge foreign exchange reserves.

  • Posted by Dave Chiang

    Reply to HK,

    The current international finance architecture is based on the US dollar as the dominant reserve currency, which now accounts for 68 percent of global currency reserves, up from 51 percent a decade ago. This phenomenon is known as US dollar hegemony, which is created by the geopolitically constructed peculiarity that critical commodities, most notably oil, are denominated in dollars. Everyone accepts dollars because dollars can buy oil. The recycling of petro-dollars is the price the US has extracted from oil-producing countries for US tolerance of the oil-exporting cartel since 1973. This creates a built-in support for a strong dollar that in turn forces the world’s central banks to acquire and hold more dollar reserves, making it stronger.

    World trade is now a game in which the US produces dollars and the rest of the world produces things that dollars can buy. The world’s interlinked economies no longer trade to capture a comparative advantage; they compete in exports to capture needed dollars to service dollar-denominated foreign debts and to accumulate dollar reserves to sustain the exchange value of their domestic currencies. By definition, dollar reserves must be invested in US assets, creating a capital-accounts surplus for the US economy.


  • Posted by Gcs

    the fair wages of
    my formal frivolities i guess

    dear dave however is made of quite hard stuff
    as his response demonstrates

    as a general i’d send him
    to defend a bastion
    “at all cost to the bitter end ”
    and i suspect i’d find some one else
    to lead a reconnaissance
    of the enemy positions

  • Posted by Gcs

    seems also
    i have no diplomatic relations
    what so ever
    with either hk or dc
    again fair wages for frivolity
    in courts of high solemn council

    but at any rate
    glad to see we agree

  • Posted by Guest

    New reserves of economic power: Petrodollars will probably provide all oil exporters with a total current account surplus of about $450bn in 2006, and this new financial muscle is unlikely to disappear, writes George Magnus of UBS Investment Bank.

  • Posted by Guest

    “…If the US moves to reduce its oil consumption it will have a significant effect on world demand. This creates a scenario where oil production increases while consumption slows its rate of growth. If this occurs, then the oil price will fall rapidly as the supply demand tightness eases and people become far less worried about possible interruptions to supply, taking out the risk premium. The only caveat to my scenario is if we have reached peak oil production… A range of views place peak oil production somewhere between 2005-2036…”

  • Posted by gillies

    ” why one would stop  
    holding reserves 
    in dollars simply 
    because now u buy oil 
    in euros escapes me ”

    – but it did not escape henry kissinger in the early seventies. dave chiang may have the wrong emphasis – and of course there were no euros then – but the system of recycling set up in a deal with some of the oil producers, then, remains a fundamental part of the global financial structure now. it is like the effect of gulf stream on the irish winter – invisible, but if it ever fails we will know about it . . .

  • Posted by Nathan

    Where did you get your M3 numbers from? I pulled the data from the Fed and according to my calculations, M3 increased by 44.2% from December 2000 through the last data point in January 2006. The comparative numbers for M1 and M2 are 27.1% and 36.7% respectively. I think the case can be made that loose monetary policy, is fuelling some of our current inflation, (and a decline in purchasing power of the dollar), but also remember China’s currency is tightly bound to the USD, and hence the relative decline of the dollar has also forced a relative decline in the yuan.

  • Posted by ABC

    Fed as well, I’ll recheck my calculations


  • Posted by ABC

    Woops, you are correct. Apologies

  • Posted by Stormy

    David Chiang and others:

    Read the following remarks from Chris Cook, “former director of the International Petroleum Exchange and an energy consultant, is the originator of the Iranian Oil Bourse project.”

    “If we could just look at the Euro first – there aren’t enough Euros to go around to even begin to cope with demand that would be needed if we were to start pricing in euros, and I don’t think the European Central Bank would start printing those quantities, that would be almost a declaration of war by the ECB on the US. I don’t see that as a practicable proposition. Other currencies I see as pretty peripheral.”

    In short, oil in terms of dollars is not about to change in the immediate future, which is one reason some oil rich nations are pegged to the dollar.

    When they relax the peg, then worry.

    The dollar has become the new gold standard. Enjoy it while you can.

  • Posted by Stormy

    How to distinguish China account surplus from that of oil producing nations, say, for example, Saudi Arabia?


    Saudi account surplus is exclusively the result of a Saudi company: Saudi Aramco.

    China’s account surplus is the result of foreign FDI.

    FDI in Saudi Arabia has not led to its account surplus; it has in China.

    End of problem.

  • Posted by Stormy

    If we are required to look at China and Saudi Arabia from Mars and are not allowed to look further than the account surplus, then the question is meaningless.

    One way or the other, you have to look below the account surplus.

  • Posted by HK

    Dave–I do not intend to prolong argument on the so-called dollar hegemony. But I still think the fact that the oil prices are denominated in the dollar is only a small part (or a result) of the dollar hegemony. Also I think the importance of the dollar hegemony is grossly exaggerated. Anyway, whether and how long the Bretton Woods 2 (the dollar peg by major surplus countries, including China and Saudi Arabia) can be sustained is more relevant for the discussion on the global imbalances. Here, I am quite sure that the BW2 will unravel within a few years, though the dollar hegemony may continue for some decades.

  • Posted by bsetser

    Let me associate myself with Mr. Sel’s point — the same forces that have propelled China’s current account surplus also have propelled the surge in oil prices. Hence the unusual correlation.

    I also like the Magnus article — and I’ll write more about it soon. Gillies — nice to hear your voice as well. I don’t buy the various oil conspiracy theories, but the willingness of the oil exporters to channel their oil windfall into (offshore) dollars is a huge part of the global economy, and it supports a lot of financial activity. More on that later.

    I may have framed my point about the surge in Chinese exports not just representing a shift in the location of production in Asia a bit too provacatively (by the way, MNCs are clearly a part of that process, tho i do think the evidence suggests that Chinese suppliers are providing a rising share of the value-added in Chinese exports). But i think the evidence is pretty clear. If China was just replacing other asian economies as the end point of assembly, one would expect over all imports from Asia to be constant as a share of GDP, and US exports to all of Asia (including various components) to be constant as well. that is not what we observe. US imports from all of Asia are rising as a share of us GDP.

    that reflects, no doubt, some shift in the point of final assembly in the electronics chain. Taiwanese firms all do their final assembly in China now. But it also reflects a rise in the set of goods imported from Asia to the US, does it not? I am not denying the obvious– there has been a shift in the location of final assembly. I am arguing that this is not all that is going on either.

    as for “does it all reflect loose monetary policies in the US” — well, there certainly is an argument that it does. Daniel Gros of CEPS has made it well. US stimulates domestic demand with loose money, and it feeds through the global economy through higher demand for asian exports and oil. I think that is part of the current story, but not all of it.

    China has imported loose US monetary policy and then some — ever looked at the m2 growth numbers for China over the past 5 years. they are impressive. that explains some of the surge in demand for oil too. and the oil surplus.

    it doesn’t quite explain why the oil exporters have been so willing to add to their dollar bank accounts and so unwilling to spend those dollars … which is a big part of the current global economy. or explain why fast money growth in China hasn’t fueled inflation, but has instead fueled a big jump in domestic credit, asset price inflation and an investment boom.

  • Posted by Guest

    Luckily, the only thing that the US can make cheaper than the Chinese are dollars. Whew!

  • Posted by CalculatedRisk

    Off-topic: Japan’s Trade Surplus Narrows as Export Growth Slows

    Aug. 23 (Bloomberg) — Japan’s trade surplus narrowed for a second month in July as sluggish global growth curbed demand for exports and imports grew at a slower pace.

    The trade surplus narrowed 0.2 percent to 859.9 billion yen ($7.4 billion) from a year earlier, the Ministry of Finance said in a report today in Tokyo. The median forecast of 37 economists surveyed by Bloomberg News was for the surplus to widen to 950 billion yen.

  • Posted by MTC

    Dr. Setser:

    When you write

    “it doesn’t quite explain why the oil exporters have been so willing to add to their dollar bank accounts and so unwilling to spend those dollars … which is a big part of the current global economy. or explain why fast money growth in China hasn’t fueled inflation, but has instead fueled a big jump in domestic credit, asset price inflation and an investment boom.”

    is not what you really mean

    “it does not explain why the GCS countries and China are still pegging their currencies to the dollar”?

    The difference is significant because we know some answers for the former rather than the latter.

    The governments of the Gulf Coast countries are unwilling to increase domestic spending because such largesse would shift public expectations. The orgy of public spending and the proliferation of government make-work jobs as a result of the oil price rises of the 1970’s and early 1980’s led many to believe in a permanent free ride. Fertility rates remained high; young college graduates came to expected jobs for everyone. As expansion of non-Opec production and conservation measures caused prices to slide in the 1980s, it became impossible for the states to maintain their lavish social spending schemes. Suddenly, all of the Gulf states had hordes of unemployed and underemployed young people with poor prospects. The youth found both a refuge and an explanation for their plight in the fiery sermons of radical clerics. The rulers of the states themselves, having no money to lavish on their subjects, sought legitimacy through displays of extreme piety.

    And we all know the result.

    The present generation of rulers do not want to go down that road again–so they sit on their growing dunes of dollars.

    As for the Chinese conundrum, for consumers at least, inflation is not a purely monetary phenomenon. If the country has sufficient and indeed excessive productive capacity for the basics, consumers will reach a plateau in basic consumption. You can only eat three square meals a day. You want only one washing machine in an apartment. You cannot justify the ownership of more than a dozen white dress shirts. After the desires for basic consumption goods have been met, consumers will seek security goods–life insurance, health insurance, personal savings. Putting cash into all of these represents spending for the consumer but savings for the financial system and the government statistician.

    In China’s case, the pre-reform era’s iron-clad guarantees of lifelong economic and health security have been withdrawn. One should therefore expect a long-term suppression of personal goods consumption in favor of the purchase of security–a plateau in the aspiration consumption slope. Eventually, incomes will rise to the point where Chinese consumers feel secure enough to spend on a new level of aspirational goods–but it will be a while before a sizable number of them get there.

    In the interim, however, the financial system will be swimming in funds–encouraging an investment boom.

  • Posted by bsetser

    MTC — good point. Tho at some point a fiery cleric may ask why the rulers are lending their sand dunes of dollars back to the US, to finance US (fill in the blank) … right now, some gulf states are spending about 1/2 of their oil revenues, and saving about 2/3s. That is great for hedge fund managers friendly with Gulf sheiks, but, well, it leaves a huge gap between actual and potential living standards for the masses. I understand the need for insurance against an oil slump, but, wow, right now the scale of the insurance seems disproportionate.

  • Posted by Dave Chiang

    Hi Brad,

    Rising Energy prices and the soaring US trade deficits are a direct result of massive monetary inflation by the Federal Reserve. From William Pesek who writes about the Chinese economy and global economics, ” Greenspan was in the limelight for the wrong reason: He participated in the U.S.’s boom — some might even say he acted as cheerleader — as opposed to regulating it. His easy-money policies brought the party to new heights, fueling asset bubbles in the U.S. and, more recently, China. Lots of cheap, U.S.- provided money flowed into already overheated Chinese assets. ”

    ” Yet the forces suppressing inflation in recent years may be waning. Globalization reduced wage pressures in industrialized countries. Now, not only are developed-nation wages rising, but so are those in developing Asia.

    China, for example, is waking up to a side effect of its economic boom: pollution. After years of keeping the global cost of manufacturing artificially low, there’s political pressure within China to make production more expensive to account for and limit damage to the environment. That, at a time of record oil prices, may push up inflation rates around the world.

    Debt is an issue, too — government and otherwise. “Household debt has risen sharply in many countries, and so the impact of higher interest rates on the debt-servicing costs of households is more burdensome than in the past,” said Mingchun Sun, Hong Kong-based economist at Lehman Brothers Asia Ltd. ”


  • Posted by MTC

    Dr. Setser –

    There is no textual basis for redistribution of property. Alms-giving, generosity, yes–but not the equitable dividing up of national wealth. Furthermore, family and tribal loyalties will defeat any division plan–start redistributing and your immediate relatives will take the biggest cut.

    You have railed about the oil-producer’s camouflaging of their dollar holdings. It is not as though they have a choice. The kings, sheiks and emirs do not tell anybody about the true status of their currency reserves not in order to make Dr. Brad Setser’s life more complicated but because there is no place to park the money that escapes censure. The fiery clerics believe that earning interest income alone is a ticket to hell.

    Best to just hide the import revenues, pulling them out from their hiding place (Country Code 44 Area Code 20) when the lean times return.

  • Posted by Guest

    Alaa Al Aswany: Voice of Reason

    You’ve talked about the importation of Saudi values to Egypt, would you elaborate on that?
    Over the past 25 years, about a quarter of the Egyptian population has gone to Saudi Arabia at some point to work. Those workers were often uneducated Egyptians, and the Saudis were rich. The Egyptians were influenced by the Saudi interpretation of Islam and brought it back with them when they returned to Egypt. That interpretation—Wahhabism—is very strict and concerned mostly with form, from wearing the veil to enforced prayer five times a day. It is an aggressive, intolerant approach that institutionalizes Islam as a state religion rather than allowing people to interpret it in their own individual ways. The Saudis have spent millions to export Sunni Wahhabism throughout the Middle East, in part because many Arabs in the Gulf States are Shiite. The Saudi princes fear the spread of the Iranian Shiite brand of Islam, which is more revolutionary and allows for more individual rights. Throughout much of Islamic history, Sunni governance has been in the hands of sheikhs who were in league with governments. The Shiites were usually shut out of power, so they had time to think and come up with a new, more humanist interpretation. I’m not comparing Iranian human rights to those in England, but in relation to Saudi Arabia, Iran has more respect for individual political rights and the people’s right to know what’s happening. And I must remind you that the American administration has been the most powerful supporter of the medieval Saudi regime because of Saudi oil. To support them is like having a tiger in your house.