What can not go on forever seems to be going on forever: China’s amazing January reserve growth
Let’s just say that Wang Qishan has his work cut out for him.
Reuters reports that China’s reserves increased by $61.6b in January alone.
That is a stunning sum. $60b is roughly the size of the US monthly trade deficit. Annualized, the implied increase in China’s reserves tops $700b.
And the real increase in China’s foreign exchange holdings could be even bigger. We don’t know what happened with the banks’ (large) fx position. It could have fallen, increasing the reserves of the central bank. Or it could have increased. My friend Logan Wright told Michael Pettis that China hiked its reserve requirement in January and the banks were required (oops, encouraged) to meet that requirement by holding even more dollars. If Logan is right, the total accumulation of foreign exchange by China’s state then could have topped $80b.
To be precise, the $61.6 increase includes some valuation gains. Strip out the effect of the euro’s January rise, and the "real" increase in China’s reserves was "only" $55b — or about $20b more than can be explained by FDI inflows and China’s January trade surplus. Some of the difference — maybe $6 to $7b — is explained by interest income on China’s existing reserves. Some likely reflects ongoing "hot money" inflow.
A $55b monthly increase works out to an annual increase of around $660b. That is big — but not implausible. In my January paper on China’s foreign asset accumulation I estimated that China’s state added at least $500b and perhaps as much as $600b to its foreign assets in 2007, with much of the increase "hidden" in the state banks. $660b is only a modest acceleration.
The sums involved are so staggering that I suspect that they have lost their ability to shock.
But think of this:
China added $55b to its reserves.
Saudi Arabia added $18b to its foreign assets in January.
Those two countries combined to add around $73b to their central banks portfolios. That means that those two countries alone could have supplied the $62.5b a month the US needs to sustain a $750b current account deficit and still had a bit left over to buy euros. Or they could have provided enough money to finance capital outflows from the US along with a current account deficit.
It kind of makes you wonder why the US goes through the motions of selling Treasury and Agency bonds on the open market rather than doing direct placements with a few big central banks.
China after all wasn’t the only emerging Asian central bank to add to its reserves in January. The other emerging Asian central banks added something like $30b to their reserves — bringing the regional total up to $85b.
That is a one trillion dollar annual pace of reserve growth from a region that is a large net importer of oil. They did so without being asked by the US - and without asking anything from the US in return.
If oil averages around $100 a barrel and the oil exporters only need $50 a barrel oil to cover their import bill, the current account surplus of the major oil exporting regions and Norway would be in the $700b range. Most of that will end up in the hands of central banks and sovereign wealth funds.
Moreover, some of the oil exporters are attracting inflows of private capital.
If US rates cuts put more pressure on the yen than Japan can bear and Japan
ends up intervening, my ballpark math suggests that it is not beyond the realm of possibility that total official asset accumulation could reach $2 trillion this year.
That is a stunning sum — and probably is too high. It assumes January’s reserve growth in the emerging world will continue for the entire year — a huge assumption. But it actually doesn’t seem all that out of line with the available data from January.
Paletta and MacDonald made a pretty strong case that the US needs to reconsider its existing bank regulatory framework on A1 of yesterday’s Wall Street Journal:
"Did banks know how much risk they were taking? Did they know how much capital they needed to cushion them from sour loans? Did they prepare themselves adequately for the evaporation of "liquidity," or their ability to easily sell their securities or loans? The answer to all three questions appears to be "no."
I would suggest that China’s January reserves data provides an equally compelling case for a reconsideration of the world’s global monetary architecture. An international monetary system that requires this kind of official intervention - and likely will lead to more inflation in the emerging world than the emerging world wants and more government ownership of financial assets in the US and Europe than the US and European public wants — strikes me as hard to sustain for much longer.
Rodrik and Subramanian have put forward one proposal for rethinking the global financial system. I am sure there are other interesting proposals as well. Jeff Frankel, for example, presumbly has thought about this question.
i think more reserve growth is still on cards as bond market collapse. why should somebody get yield of 1.7% when officially stated inflation is neearly 5%. everybody is there in bond market as of now because everybody expects bond price to rise just like housing. so as investors flee central banks are more likely to increase even faster reserves to maintain the peg. i expect china to add reserves of 1 trillion/year rate in last two quarters.
Satish — don’t those reserves have to go somewhere, and aren’t they especially likely to go into the bond market.
sure. that’s what will kepp floor on bond prices till the peg is removed. bond market is not going to collapse. central banks will completely replace private buyers. ofcourse some arbritragers.
We will surely reach a tipping point in a few years when safe nominal assets will need private buyers. I sure don’t think that implies a 3.70 yield on 10 year treasuries.
re: “rethinking the global financial system”
that’s an understatement when the whole concept of central banking is being invalidated before our eyes…
Amazing. One day this whole system is going to collapse.
Brad,
I’d be curious about your view on the Obama policy of tax incentives to keep companies here. Seems it is kind of treating symptoms not cause (global financial architecture as you discuss). It is astounding that the the central bankers around the world are in complete denial. Why is it so difficult for these guys to figure out that globalization is an utter failure in its current form.
China is simply going to ride the system until it explodes as it is in the left lane to industrialization and has an interest in seeing the system endure - dollar reserves be damned. A sysreset could have very beneficial consequences for the United States in the mid to long term granted short term pain (but economic and national security benefit long term).The continued debasement of the dollar will precipitate this reset. It is happening in slow motion, but there is a feel that a somethng unexpected and cataclysmic is in store.
As a follow on thought, could it be that despite the financial system issues, the United States is purposefully trying to break the system by making the ripple effects of its policy so unsustainable the pegs have to break (GSS/China). Coordinated action by US/ECB would force some form of free float and hence force a major revaluation…perhaps this is bit far out maybe even crazy…but the current system is no longer in the nationla interest of the United States - our technology and competitive advantage windows are being collapsed by current regme and the uphill/downhill issue as discussed are encouraged.
I don’t think the US is intentionally trying to break the system. But the US also is not going to make decisions that make it easier on the rest of the world to sustain their managed currencies. It will do what it thinks is in the interest of the US economy.
“…the rates that banks charge each other for short-term loans remain elevated, a sign of how cautious banks still are about using their capital. In other markets, investors are signaling distress at banks. For example, the cost to buy insurance against a bank debt default is soaring… Banks are at the center of the storm. Even though they have already taking billions of dollars of write-offs on troubled subprime debt, many banks still don’t seem finished with that reckoning process…” http://online.wsj.com/article/SB120472825003913597.html
“…Kohn’s comments mark one of the few times that a top Fed official has acknowledged shortcomings in regulation as a cause of the mess… “I don’t know that we fully appreciated all the risks out there,” he told the Senate Banking Committee. “I’m not sure anybody did, to be perfectly honest.”…” http://online.wsj.com/article/SB120467897294111857.html
Brad -
“That means that those two countries [China and Saudi Arabia] alone could have supplied the $62.5b a month the US needs to sustain a $750b current account deficit and still had a bit left over to buy euros.”
I don’t mean to be a pest about this point, so I promise this is the last time I will raise it. But I really think it is better to view the Asian official reserve growth as causing trade deficits in the rest of the world, rather than to view this reserve growth as a means of financing deficits that would somehow have happened anyway (as seems to be the view implied by the above statement in quotes). The official reserve growth means that, by deliberate government policy, they stopped their currencies from moving to values that would have reduced their current account surpluses, which means they created deficits in the trade accounts of others. The only way to escape this conclusion is to argue that, absent the official reserve accumulation, there would have been an equal increase in net private capital flows out of these countries. (This follows from the balance of payments identity: Net private capital ouflows + net official capital outflows = current account surplus.) Does that seem likely?
If my memory serves me right, two of the leading Asian economies - South Korea and India are running current account deficits, despite their strong reserve growth.
India certainly has a deficit. I haven’t checked on Korea recently but it could easily have one too. But I with a few caveats (i.e. noting that intervention sometimes keeps a deficit smaller than it otherwise would be as well as keeping surplus bigger than they otherwise would be) I would agree with much of Don’s argument.
I certainly don’t see private capital outflows from China sufficient to balance the capital and current account at the current exchange rate.
That said, getting the prose exactly right on this point requires a lot of footnotes or digressions. after all offiical financing can finance private outflows (as in the eurozone) not just a current account deficit, and I have had a paper rejected for not making that point more explicit and talking of official asset build up financing current account deficits rather than official asset accumulation financing a combination of deficits and private outflows, one of which would need to adjust in the absence of official inflows.
“I don’t mean to be a pest about this point, so I promise this is the last time I will raise it. But I really think it is better to view the Asian official reserve growth as causing trade deficits in the rest of the world, rather than to view this reserve growth as a means of financing deficits that would somehow have happened anyway”
By running huge deficits and debasing its currency, the US is trying to do exactly what China and the Gulf States are doing to the US. If Twofish’s argument is correct and everyone acts only in self interest, this is something to be expected and nothing more needs to be discussed.
I don’t necessarily buy the argument- I for one say punish the guilty so that this inflationary mess doesn’t happen again. The first step: honesty. Both sides are guilty, but I would argue: there are some that are more guilty than others. Arguing about pegs and exchange rate manipulation and reserve growth is disingenuous and solves nothing: the US essentially has infinite reserves.
OT: Game Theory:
I think I just put 2+2 together:
Here is my theory as to why Ferguson resigned and then why the youngster Warsh was pushed into place; I think Bush was going to fill a vacancy with a Warsh appointment, but then as soon as Ferguson relaized how utterly stupid that would be, he resigned, and forced Bush’s hand. In that regard, I count Ferguson as an American Hero and Patriot, because his action has exposed the level of collusion and politics within The Fed!:
1. Roger W. Ferguson, Jr., submitted his resignation Wednesday as Vice Chairman and as a member of the Board of Governors of the Federal Reserve System, effective April 28, 2006.
Ferguson, who has been a member of the Board since November 5, 1997, submitted his letter of resignation to President Bush. He will not attend the March 27-28 meeting of the Federal Open Market Committee.
2. President Bush’s decision to elevate three former administration economic advisers to the Federal Reserve Board prompted questions yesterday about whether they would be able to steer the economy independently of the White House they have served.
“This is inevitably going to create the impression that the board is more political than in the past,” Schlesinger said. “This creates more of a burden on Bernanke and company to prove they’re not taking their cues from [White House Deputy Chief of Staff] Karl Rove.”
Warsh, 35, who has served on Bush’s National Economic Council for the past four years, is a special assistant to the president for economic policy.
If the situation keeps on going until it “explodes” who emerges in better shape from the “explosion”, the US or China? I’d say China. I suspect they know that and have little fear as a result. It will be a minor pain for China, but a disaster for the USA.
This blog, quite rightly, confines itself largely to discussing the economic relationship between China and the US, etc. But in the case of China, its economic policies are not just that but also serve to support its strategic and political policies. China’s long term aim is to drive the US out of East Asia and assume the dominant role that Japan attempted to gain but lost as a result of WWII. That requires severing the bonds between the US and Taiwan and Japan and moving the US strategic frontier back to Hawaii. At some point, if the US has not already retreated, China will be able to force us to get out, perhaps by using the economic weapon of its vast dollar reserves, or those in conjunction with military moves. As long as the US can’t stop spewing dollars all over the world, it is simply feeding China with more economic weaponry to use against us. And China finds no real reason to stop that.
OPEC blames ‘mismanaged’ U.S. economy for soaring oil prices
http://www.iht.com/articles/2008/03/06/business/06oil.php
The fall in the value of the dollar gives OPEC an incentive to keep prices high: Since oil is sold in dollars, petroleum producers see the value of their exports decline any time the dollar drops.
“OPEC is angry that President Bush wants them to increase production while the dollar is sinking and the administration is doing nothing about that,” said Fadel Gheit, an oil analyst at Oppenheimer. in New York. “It’s really not surprising that they have ignored him.”
What can’t go on forever, won’t go on forever, but the breaking point is difficult to predict given the complexity of the global situation. Neo-liberal globalization under US Dollar hegemony is an economic failure for the world. Essentially the US prints unlimited fiat dollars, and the rest of the world produces products to obtain those US Dollars for the purchase of the strategic commodity oil. Everyone accepts US dollars because only US Dollars can be used for the purchase of oil from the Gulf Arab states under the US military protection racket. US Dollar hegemony must be eliminated and replaced with a multi-national currency basket for the purchase of strategic commodities under a new multi-polar world order.
The bigger the bubble, the bigger the pop. The bubble just keeps getting bigger and bigger.
The thing that keeps stability is the arabs need the US and China to buy their oil. The chinese need the US to buy their goods and they need the arabs to supply oil. The US needs the arabs to supply oil, the chinese to supply cheap goods to battle inflation and the chinese and arabs to buy our debt. It’s a symbiotic relationship. The problem with symbiotic relationships is if one party fails, everything fails. It looks like the US is the most likely to fail first. The question is will the arabs and the chinese provide enough liquidity to keep the US economy going? or will they decide that Europe is a better substitute for the US?
s: I’d be curious about your view on the Obama policy of tax incentives to keep companies here.
I don’t think it’s going to make that much of a difference. You can reduce taxes to zero and it still makes economic sense to site manufacturing overseas, and if you reduce taxes too much, then you don’t have the money to pay for “public goods.”
Anonymous: China’s long term aim is to drive the US out of East Asia and assume the dominant role that Japan attempted to gain but lost as a result of WWII. That requires severing the bonds between the US and Taiwan and Japan and moving the US strategic frontier back to Hawaii.
I don’t think that *is* China’s long term strategic goal. China’s long term strategic goal involves becoming a great power and completing the process of national unification with Taiwan, but I think China is really ambivalent about having the US in East Asia, and assuming the US pressures Taiwan not to go too far (which it’s been doing), I think that China would actually like the US to remain active in East Asia.
In any case, “economic warfare” doesn’t make any sense. By purchasing more and more dollar reserves, China sets itself up for big problems if the US economy has problems, and China’s actions actually renders it more linked with the US rather than less linked. This is good for China in that it means that the US has to be nice to China, but it also means that China has to be nice to the United States.
The only explanation I can think of for this huge rise in reserves is that hidden reserves in China suddenly became unhidden. With a huge rise in the RMB, suddenly everyone wanted to convert the dollars they had hidden in their mattresses to RMB.
“…In contrast to financial derivatives, activity in commodity futures and options continued to rise in the fourth quarter. Global turnover, measured by the number of contracts traded, increased 16% to 528 million. Notional amounts were not available. Most of the rise in commodity futures trading volumes was down to the expansion of agricultural commodities, which increased 15% to 296 million contracts and energy products which increased 14% to 160 million. The BIS said a large contributor to this development was Chinese commodity exchanges, whose turnover increased 26% to 255 million contracts in the fourth quarter, posting a year-on-year growth rate of 112%.” http://www.financialnews-us.com/?contentid=2349959053&page=ushome&m=4E249MzQ1MDUwOjI3NDYyNDoxNjYwNg%3D%3D
2fish — not sure that you need the “hidden reserves” to surface, only that they not grow. Trade + FDI was close to $35b in January. Interest income is at least another $5b. That implies an underlying increase of around $40b a month. Given the change in expectations around the rmb, $15b (or less if some other numbers have been underestimated) in hot money inflows wouldn’t be a total surprise. Some of my estimates for q4 imply roughly $50-60b a month in total inflows (counting the rise in bank reserves).
If Logan Wright is right and the underlying increase is really more like $75b, that would be a major change.
S Korea’s deficit was at $2.6 billion in Jan 08 - http://www.bloomberg.com/apps/news?pid=20601080&sid=ahbwyFQtJ5PM&refer=asia
It has around $260 bln in reserves, while India has around $295 bln - deficit was about $5.5 bln for the quarter ending Sept 07, but BoP surplus was $29.236 billion due to capital inflows and invisibles.
China Central Bank diversification away from the US Dollar
http://www.dailyfx.com/story/dailyfx_reports/daily_brief/Dollar_at_New_Lows_as_1204802496310.html
Dollar hit new lows in early European trade today with EURUSD reaching 153.45 after rumors of Chinese CB selling swept the market. The diversification away from the dollar has been a slow but ongoing process amongst many of the world’s central banks, but the recent weakness in the unit may have excelerated the trend as central banks are losing millions on their dollar positions every day. The PBOC in fact has been losing more than $4 Billion per month as the spread between rates on its US investments and its domestic rates continues to grow more negative with each Fed rate cut.
I am honestly very befuddled by the Rodrik / Subramanian proposal. I don’t think it would be feasible at all for reasons I’ve already given elsewhere.
Ironically, the best chance that we may have at global rebalancing is to ensure the election of all sorts of protectionist politicians in the US and, to a lesser extent, the EU who are keen to demonstrate their love of mother country by biting the hand that feeds.
Bash SWFs? Great! Prevent the sale of Western companies on spurious grounds? Even better! Currency undervaluation legislation? Bring it on!
Well, if Treasury doesn’t explicitly guarantee FNM/FRE, why not get the backing from FCBs?
“Rumors that the U.S. government is going to offer an explicit backing to Fannie Mae and Freddie Mac are “absolutely not true,” a Treasury spokeswoman said… Investors have long assumed the government would bail them out in a crisis, but there has never been an explicit guarantee of that, and the Treasury regularly disputes the notion that the government stands behind them.” http://online.wsj.com/article/SB120481505895116677.html
2 to 3 yrs ago in here (or Roubini RGE site) there was talk every day of this massive (mostly foreign financed) credit bubble sustaining the US real estate bubble - hard to believe the Fed and other entities didn’t notice this TIDAL WAVE was coming.
DC: US Dollar hegemony must be eliminated and replaced with a multi-national currency basket for the purchase of strategic commodities under a new multi-polar world order.
Except that it is in no one’s interest to do so. Europe isn’t going to challenge the United States, neither is China or India or Russia. China has such large dollar reserves that the last thing that it wants is to make the dollar worth less.
Also you have to understand China’s geostrategy.
China’s main concern is that the United States does not do anything bad to China. The way it has done so is to link itself so tightly with the US economy, that the US simply cannot do anything seriously bad to China without shooting itself in the head.
This has some consequences. By wedding itself so tightly with the United States, it means that China can’t do anything to bad to the United States either, and it also means that China is now dependent on the health of the US economy, and you cannot have a collapse in US economic or political power without seriously damaging China. This puts China in the position where its national interests are served by propping the US up rather than pulling it down.
As long as China can keep propping the United States it will do so, but the trouble right now is that propping the US now is getting to the point where it is having bad effects on the Chinese economy.
“…the breakdown in the relationship between creditors and debtors, which traditionally worked together to keep solvent companies out of bankruptcy, lowers the system’s ability to deal with a credit crunch. “Spread across the economy, the ‘freezing’ of debtor-creditor relationships can increase systemic financial risk,”… “[It] can also increase the economy’s exposure to liquidity shocks”.” http://www.nakedcapitalism.com/2008/01/credit-default-swaps-increase-odds-of.html
Guest: If the situation keeps on going until it “explodes” who emerges in better shape from the “explosion”
It may not end in an explosion but rather in chronic pain.
The trouble with the Rodrik paper is that it seems politically impractical. There’s no mechanism that I can see for making these sorts of political changes. If the US doesn’t want to reduce fiscal deficits, then there is no international organization that can force it to reduce fiscal deficits, so any international governance system has to either be market based or involve consensus among the major actors.
shrek: Amazing. One day this whole system is going to collapse.
The global financial system is always in a state of constant collapse.
You have constant incremental changes in the global financial system, and then something really dramatic happens about every ten years or so. Chaos, collapse, and rebuilding is the natural state of the global financial system. People have this idea that somehow its better if you have this system in which nothing changes and everything runs smoothly. The problem is that living systems are unpredictable and chaotic. If you have a system in which things aren’t changing, then you have a corpse on your hands.
if china’s commodity dependency may leave it disproportionally exposed to these costs:
“…The financial markets require a recapitalisation of the banking system, with estimates ranging from $300bn to $1,000bn. By contrast, prospective capital requirements in the resource markets dwarf the current needs of the banking system. According to the [IEA], the global energy sector alone needs a real $22,000bn over the next two decades to meet the anticipated rise in primary energy demand…” http://www.ft.com/cms/s/0/d181cf3c-eacd-11dc-a5f4-0000779fd2ac.html
Twofish,
While it certainly is not in China’s economic interest to see the US Dollar destroyed, it is simply beyond the capacity of China’s government to bailout the entire global financial system based on US Dollar hegemony. The Japanese Central Bank is rumored to have come to the same conclusion a year ago. The last direct Japan Central Bank intervention was in the 2004-2006 timeframe. Although Japan remains the largest creditor nation in the world with $3000 billion in foreign assets, the $8000 trillion in US foreign liabilities is beyond the direct intervention capabilities of Japan and China combined. Individual and institutional investors are dumping the US dollar across the world.
Bernanke Policy to `Destroy’ U.S. Dollar, Faber Says
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aYoVDEWBwowo
March 5 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke will “destroy the U.S. dollar” by cutting interest rates, investor Marc Faber said.
Bernanke’s reduction in the target rate for overnight loans between banks to 3 percent has spurred a rout in U.S. stocks and gains in oil and gold prices, said Faber, the Gloom, Boom & Doom report publisher who told investors to buy gold at the start of its six-year rally.
The U.S. is now in a “de-leveraging” phase where banks make fewer loans, stunting economic growth, Faber said. He estimated that a U.S. recession began two or three months ago.
“In the U.S., they pursue essentially economic policies that target consumption, which in my opinion is misguided,” Faber said in an interview with Bloomberg Television from Chicago. “They should pursue economic policies that stimulate capital investment and capital formation.”
Whoops, I meant to say,
” $8000 billion in US foreign liabilities “
I think one difference between a policy of official reserve purchases and overall monetary expansion as alternative methods to spur growth is that one is designed to stimulate domestic demand at the expense of trading partners, whereas the other is designed merely to expand domestic demand and has currency depreciation as a side effect (the added ‘kick’ of monetary polciy under a system of flexible exchange rates).
It is curious that the Democratic primaries have focussed on NAFTA as the reason for loss of manufacturing jobs in the U.S. I have long maintained that Asian central banks would not lose their taste for U.S. dollars, rather, the end would come when U.S. demand was no longer sufficient to maintain U.S. production while ‘leaking’ as much as 5% or 6% of this demand to foreign exporters. NAFTA is doing what trade is supposed to do - reduce artificial trade barriers and allow rationalization of production to increase global economic efficiency. China’s policies have made it the world’s manufacturer, with much of the competitive advantage coming not from natural comparative advantage, but from absolute advantage caused by an undervalued currency. Of course, economists generally don’t care why imports are cheap (Bastiat’s “Candlestick Maker’s Petition). There are a few exceptions (strategic industrial policies), but these are usually discounted. So, I don’t argue that China’s polciies are necessarily harming U.S. economic welfare. Nevertheless, they are contributing to our deindustrialization in the medium term and sooner or later will become the target of U.S. political pressures.
re: “the US has to be nice to China, but it also means that China has to be nice to the U.S.”
even if they aren’t so nice to their own citizenry - whether we need to distinguish between nations’ ’self interest’ in the economies which are most important to ‘them’ and the overall welfare of respective populations, looking at forbes most recent billionaires list.
“…To travel back from São Paulo to Shanghai is to sense the real risks that China is taking with its growth-at-all-costs model… Brazil’s government has spent twice as much of its gross domestic product on health and education as communist China. Just as surprising, inequality is fast approaching Brazil’s notorious levels, despite falling poverty levels. Using the Gini coefficient to measure income distribution, “zero” means perfect equality and “one” complete inequality. The official Brazilian figure is now 0.53 and falling, while China’s is 0.47 and rising. (The US figure is 0.41 and India’s 0.31.)… Wen Jiabao, China’s premier, has promised a clinic in every village and an end to school fees for the poor. Yet success is not guaranteed. Local authorities could swallow increased funding before it reaches schools or hospitals. Political and business elites will oppose policies that might slow their part of the economy…” http://www.ft.com/cms/s/0/eff50fdc-e92a-11dc-8365-0000779fd2ac.html
Tfish
“China’s main concern is that the United States does not do anything bad to China. The way it has done so is to link itself so tightly with the US economy, that the US simply cannot do anything seriously bad to China without shooting itself in the head”
On the q of Obama I agree with that current plumbing is simply antiquated; it needs a reboot not a refresh. As for complex systems agree that no evolution no heartbeat. The problem is that the system has so many mal (ignancies) incentives built in that the natural order of things is being disintermediated. This is a good lead in to you statement on China aims. The reality is China may have its goals but the US is not wed to them. The US has benefited them but that curve is flattening and the blowback is what we are currently experiencing (ref Brad’s yield curve conundrum). As Brad said, the US will pursue its own long term interests.
If the United States did decide that it was willing to endure some pain, for which I believe the american people are fully ready to accept (and why so many of the Davos crowd are scared to death) with the right leadership, then I would be a little nervous in Shanghai. China needs time the US needs leadership seems about right. Not to downplay the current complexities and challenges in the US - they are huge, maybe massive - but the US is an idea which makes it in the end hard to kill. The dollar certainly grants advanatage but has a very low r2 to innovation. The last think the Chinese need/want is a reindustrializing United States. The last thing. Capital finds innovation and with it is on NYSE or Shanghai or Tokyo or Paris it makes no difference.
perhaps the greatest advanatge the US has today is that it remians a living organism, or a going concern as Bill gross says.
“As long as the US can’t stop spewing dollars all over the world, it is simply feeding China with more economic weaponry to use against us. And China finds no real reason to stop that.”
How can China become the dominant force in Asia when it ships all of its savings to the US?
They are building our aircraft carriers.
Anonymous: Using the Gini coefficient to measure income distribution, “zero” means perfect equality and “one” complete inequality.
One thing about Gini cofficients is that they fail to capture the fact that the differences in wealth in China are regional. The Gini coefficients in China for a particular region are actually rather low. It’s when you compare different regions that you get large inequalities.
This is why I think it is better to think of China as twenty economies in a customs/monetary union zone rather than one giant monolithic economy.
2fish:
“People have this idea that somehow its better if you have this system in which nothing changes and everything runs smoothly. The problem is that living systems are unpredictable and chaotic. If you have a system in which things aren’t changing, then you have a corpse on your hands.”
This is right on. The monetary system in particular is inherently dynamically unstable. That’s because it’s a sort of blood supply to a living economy. It has to be regulated in some way to remain in rough balance.
I think a gasoline tax would have been a brilliant idea back when Clinton-Gore entertained the idea in the mid 90’s — or even in the early 2000’s. Back before $100/barrel oil, such a tax would have allowed us to plow revenue into alternative energy research that instead has gone to middle eastern sheikdoms with a taste for under-the-table support of radical islam.
Such taxes might still be necessary for various reasons, but such a missed opportunity!
Ouch. This seriously calls into question whether these capital flows can be maintained in the short term, let alone the medium and long term. The emerging market picture Brad has outlined is this: destabalizingly high and increasing levels of inflation, unprecedented accumulation of pittance earning foreign exchange reserves- huge swaths of which are secured by increasingly suspect government sponsored enterprise balance sheets- declining trade surpluses as the US economy slows, and, in the case of Asia, the increasing protectionist ire directed their way from both the US and Europe. This all begs the question: what’s in it for these counties to continue to prop up the US dollar? And the only answer- the dire ramifications of their not doing so- becomes less and less persuasive as the current monetary regime looks less and less tenable going forward.
For example, all of these country’s regimes are hugely sensitive to political stability. What happens if, given the picture Brad has outlined, there starts to be a significant uptick in social unrest in China or Saudi Arabia whilst the deepening US credit and financial crisis increasingly casts it as a free loading basket-case? I fear that, largely because these countries have not looked for a way to gradually transition from the current monetary regime, (and China’s crawling peg was simply too insubstantial to qualify), they may find at some point that the luxury is no longer afforded them.
Majorajam — astute points
re: “living systems are unpredictable and chaotic”
right so the problem currently is the false assumption that they’re not — fake alpha and all; iow, unstable equilibrium means exactly that… and presently we’re getting kicked out big time.