Be it support or disagreement , thanks! Made blogging here all the more interesting.

Here are some responses to Brad’s comment:

”
debtors should take a moral view and not borrow more than they can pay (i would protest here that creditors should start to raise rates to discourage more borrowing if there are questions about repayment,”

Morality is the last thing on my mind. All I had meant to say was creditors cannot force or cause debtors to borrow more. There is choice, for the individual or country, to choose debt or other forms of financing and how to spend that debt once they obtain debt financing. Apart from banks (who presumably reinvest the debt capital) and those in in the carry trade, no one remotely rational takes out a loan they don’t require, whatever the interest rates or credit terms.

“always thought the creditors bore some responsibility for lending to high-risk debtors.”

Oh dear, are we talking about debt or drugs? The only responsibility that creditors bear for lending to high risk debtors is that of losing the loan capital, interest etc, particularly if it isn’t their own money . Last heard, debt does not have the addictive qualities of drugs, hard to see a feeding of the habit argument here!

“Fair enough. but if the debtor isn’t willing to borrow and the creditors are still saving the same amount, the world is out of equilibrium.”

Brad, I know what you’re pointing out. That view is dependant on 2 principles; theoretical equilibrium and the savings identity/equation.

If you look a little closer at my last comment, I was subtly saying that I didn’t believe in there being equilibrium in the short or medium term. As for the long term, Keynes had something to say about that. Didn’t Adam Smith hypothesize (very rusty on the economic theory/history) that trade arises because of imbalances and the need to address them. Unfortunately, there are also views that posit globalised trade has exacerbated those imbalances or created new ones, bit hard to miss those if you listen to some of those anti-globalisation protestors.

As for the savings identity/equation, it is borne out of the double entry system of accounting, to build causal relationships on that may be tenuous. Based on some knowledge of economics and accounting, I can say that the double entry system started off with the intention of balancing figures to create a snapshot of the assets, liabilities and capital situation of the particular entity. Won’t bore you with accounting conventions but they are “adjusted” figures , adjusted to reflect events and ultimately to produce balance sheets where assets =capital+liabilities. From an entity’s viewpoint it is a closed system therefore there has to be equilibrium/balance since any imbalance has to be corrected by an adjustment in one of the corresponding entries . This won’t work if you were to amalgamate accounts of different unrelated entities around the world, imbalances on a global scale do not balance up or cancel out in such simplistic terms. To posit zero sum theory for every argument is to say that all the world is doing is pushing pencils and figures .

As for partiality, perhaps it is the domain of those who aren’t quite convinced by mainstream theories or the authority of academic bastions ; that’s just me !

I understand that foreign reserve is a result of lack of buying US made exports, and not vice versa. I am not sure foreign governments buy the $ to prevent imports as much as they get stuck with them when they’re not used for import?

Investment in American production would help put dinner on the table, but would it matter much where the investment came from? Profitability of the investment is the main point, I’d have thought, regardless of who invested.

I agree that a sudden depeg would cause too much of a splash.
Howard Richman
Import tariffs could also be used to battle “merchantilism”, or would that not be considered gentlemanly in this age. In my opinion, it is useless to talk about free trade without freely traded currencies –at market value, and I’m surprised that wasn’t a bigger issue in the past.

Thanks for taking the time to set me straight.

I mostly agree regarding in 2008. This wasn’t true ten years ago, and part of the challenge is that policies that make sense in 1998 don’t make any sense in 2008.

One thing that is the case with China is that since the RMB is not convertible, China runs some serious risks in running a general trade surplus. At basic you can have China run a zero balance of trade which would likely result in trade deficit with the United States, albeit one smaller than the current deficit.

Richman: You wrote that Chinese policies toward mining are different than their policies toward other things. But we weren’t talking about mining, we were talking about mining equipment!

We are talking about mining technology.

Richman: So Ford and GM are seeing their stock prices plummet and may eventually go bankrupt, and there’s this growing Chinese market for automobiles that is totally out of reach of American companies.

So why aren’t Toyota and Volkswagen hurting the same thing? Also as part of the WTO negotiations, the current tariff is much smaller than it was pre-WTO and also as part of WTO, the US was able to get China to remove all quotas and import licenses.

This is the big problem with “blame China.” GM and Ford are hurting because of GM and Ford. You can remove Chinese tariffs on autos, and I bet that Toyota is going to benefit more than GM or Ford.

Richman: Actually, balancing trade would increase American jobs because demand for American-made products would increase.

That’s assuming that imports increase. You can also get balanced trade by cutting exports.

Thanks for engaging in debate.

My explanation for the coexistence of a fiscal “contraction” and a continuing current account deficit is that the credit binge not only sucked in imports but simultaneously raised taxes and reduced entitlement spending. Spain showed this mechanism even more clearly than the US.

Why are both Asian and oil producing countries saving? Because both are linked to the rise of Asia. Asians seem to have a higher propensity to save than Anglo Saxons at least, and it is relatively easy to save a large fraction of income when even your post-saving income is much higher than you are used to. And of course, as Asia grows, it is better able to compete for natural resources, so the oil producers have more income than they know what to do with!

I don’t say that the credit boom was caused by interest tax relief – most central banks proved unable to keep monetary policy tight as the initial impact of the rise of Asia was to reduce consumer prices. I do, however, think that cutting it back when rates were low (as the UK did) could have helped a bit to restrain the boom in the US.

This brings me to your feeble weak US policy recommendations. In both cases, you say too politically difficult to do now, but the case of the interest tax relief shows that the time is never right. What I would hope to see from you is some definite proposals that could be thrown back at you in the event that you serve in some future administration, in order to embarrass you into doing the right thing!

a) I have consistently supported an effort to bring the US fiscal deficit into balance over the cycle, and more recently have put more emphasis on the need for a true energy policy that reduces US demand. Policies that reduce demand — and taxing it is one obvious way to reduce demand, though that is politically hard — would tend to lower prices, and thus cut into the savings surplus of the emerging world as well as the US deficit (with some offset to the expected fall in savings abroad coming in asia, which would also benefit from lower prices)

b) the mortgage interest tax deduction isn’t great policy, but it has become impossible to change right now — with home prices falling, and with falling home prices putting pressure on the financial system, getting rid of a support for home prices would only add to the current crisis. it is also hard to see how it created the bubble (as opposed to being one of many background conditions) given that the tax deduction has been around for forever. there was no change in policy here that prompted the acceleration in home prices/ home equity withdrawal world in the bubble years.

c) if I may say so, your analysis is partial, tho in a different sense:

1) If US fiscal tightening reduced US demand and increased US savings, the likely result would be lower US rates and a WEAKER dollar. that weaker dollar would be transmitted to China through the dollar peg.

2) Imports from the world (and imports from China) are only a portion of US demand. A cut in fiscal would thus not produce a dollar for dollar fall in the US trade deficit/ the US deficit with China/ China’s surplus (though directionally it would reduce it). The overall impact also hinges on whether private savings falls as public savings rises (as happened to a degree in the 04-06 period), and thus the change in total US demand for borrowing from the world.

My example where China’s savings doesn’t adjust (i.e. China responds to a fall in income by cutting back on consumption rather than cutting back on savings) was meant to be illustrative of the point that both sides have to adjust, not just one. Think of it as what might happen if a fiscal contraction produces a dollar fall and a RMB fall. China might make up for the fall in US demand by selling more to the world — and its still large surplus would continue to depress rates globally, encouraging private borrowing (and thus encouraging a fall in private savings v investment that offsets some of the effect of the fiscal contraction).

I have been struck by how little the US current account adjusted when the US fiscal situation improved in 04-06 — and by the fact that US long-term rates didn’t move even as the US hiked short-term rates. That led me to conclude that factors abroad may matter more than I had previously thought. I also have been impressed by the rise in the savings rate in emerging asia and the oil exporters over this period. the simultaneous rise of both is a bit of a puzzle. I would be curious to know how you would work those data points into your analysis.

Lets talk about Ford and GM. I presume that you would accept that one reason why they are uncompetitive is legacy costs. This is another example of the same old US problem – neglecting to save realistically for the future. The US car manufacturers partially paid their workers in uncovered promises, which allowed them to deny their lack of competitiveness (to which I would agree that Asian protectionism has contributed) for many years.

Your argument to Judy is what my grandmother would have called partial (as in the opposite of impartial). You usually attribute China’s reserve accumulation to its currency policy. Presumably, therefore, if a US fiscal policy tightening (which would not be a bad idea) reduced import demand, China’s dollar reserve accumulation, and its sale of sterilisation debt at home, would automatically fall.

I have a little sympathy with the view that cheap loans encourage irresponsible borrowing. But I dare say that US interest tax exemptions are worth more to the private sector borrower than the impact of reserves accumulation. Anyway, China has lent most of its money to the US government, not the US private sector. Are you saying that the US government cannot be a responsible borrower when offered low interest rates?

It would be interesting to hear more constructive criticism of US economic policy and some concrete proposals from you about what the US should do. Or would that be a hostage to fortune?

Could it just be that Stephen Roach and Roubini have an audience somewhere in Switzerland. The Davos crowd couldn’t get its hands off Roach this time around – although they kept him off the panels in the last two years!

So when will rates go up, like they were supposed to, 8 years ago?

US leadership (the Fed deserves the lion share of blame) has encouraged a consumption society at every turn. “Hold hands and buy an SUV” has been the Fed mindset. Nobody is prepared to tell consumers they have to save and compete. The culprit is clear, so please don’t muddy the waters with issues of other countries.

One other thing, you were incorrect when you wrote that balancing trade would cause unemployment “since jobs that rely on imports would disappear whereas jobs that rely on exports would increase.”

Actually, balancing trade would increase American jobs because demand for American-made products would increase.

Howard