A large, truly global slump
China’s GDP growth stalled in the fourth quarter, which represents an enormous deceleration from its typical fast growth.
US GDP fell at a close to 4% annualized rate in the fourth quarter. The decline would have been steeper but for a big buildup in inventories. That will subtract from growth in q1.
Japanese GDP growth fell by around 10%. Some estimates are now even putting the q4 fall, annualized, at close to 12%. The fall in smaller Asian economies was often even larger.
And now we know that Europe’s GDP fell by 1.5% q/q, or 6% annualized. Germany, until recently Europe’s strongest economy, contracted at an 8% annual rate.
According to the European Union’s statistics office, the economy of the 16 countries sharing the euro currency declined by 1.5 percent in the fourth quarter. On an annualized basis, that would indicate a contraction of 6 percent — considerably deeper than the 3.8 percent annual rate of decline in the American economy in the same quarter. The performance was worse than many economists had expected, and it was even more pronounced in Germany, the euro zone’s most important economy. There, the economy shrank by 2.1 percent from the third quarter, when it had already contracted by 0.5 percent.
There is a lot of spare capacity in the global economy now.
Back in the 1990s, the vogue was to talk of capital account crises. A “sudden stop” in capital flows to an emerging economy triggered big fall in output; countries that relied on capital inflows to cover their external deficits had to bring their imports down suddenly — and that usually meant a sharp economic contraction.
It consequently is striking to me that the countries with the steepest falls in output in q4 have been the countries that are known for relying heavily on exports for growth –
They in effect are suffering from a sudden stop in global demand, which has given rise to a sudden stop in trade flows. Or perhaps a sudden stop in finance led to a sudden stop in demand, a sudden stop in trade and sharp falls in output.
Last summer — in Sovereign Wealth and Sovereign Power — I worried about the risk that China, or another major sovereign creditor, might stop financing the US if the US adopted policies its creditors opposed. As a borrower, the US was vulnerable to a sudden interruption in capital flows. I was implicitly drawing on the analogy of the emerging market crises of the 1990s.
It turns out though that — with a big enough shock — the volatility in output that can arise from a current account shock can be almost as big as the volatility from a capital account shock. Economies that relied on exports for growth weren’t invulnerable to external shocks. They just weren’t as vulnerable to capital account shocks …
The US took a risk by relying so heavily — for a time– on China’s government for financing. China likely bought about $400b of US debt in 2008, a non-trivial sum. But China took a risk by relying so heavily on American and European households for demand. Since these households relied on credit t maintain a high level of spending, China was exposed to a US banking and financial crisis.
Asian nations responded to the crises of the 1990s by taking a slew of steps to reduce their vulnerability to capital account crises, but in the process increased their vulnerability to “current account crises.” Their economies became more dependent on exports, and more of their exports came from countries whose external and internal finances looked a bit shaky …
One big question going forward is how will Asian nations try to reduce their vulnerability to crisis that come from the current account ….
This is a niggling point, but I don’t see a buildup of inventory. Rather, a much lower inventory shrinkage than in the previous quarter. That, then, doesn’t imply an amplified inventory shrinkage to follow, as you suggest.
TA — i was working off reports like this:
“inventory accumulation … added 1.3 ppts to the GDP bottom line” in q4 08
Portends More China Bashing ….
China’s Economy Shows Signs of Recovery on $585 billion Stimulus
Feb. 13 (Bloomberg) — China’s economy is showing signs that a 4 trillion yuan ($585 billion) stimulus package is taking effect.
The world’s third-biggest economy may expand 6.6 percent in the second quarter after slowing to 6.3 percent in the three months to March 31, the weakest pace since 1999, according to the median estimates of 14 economists surveyed by Bloomberg News.
“China looks set to be the first major economy to recover from the current global meltdown,” said Lu Ting, an economist with Merrill Lynch & Co. in Hong Kong. “China is the only economy in the world to see significant growth in credit to corporate and household sectors after September 2008, when the financial crisis worsened to a near collapse.
http://www.bloomberg.com/apps/news?pid=20601089&sid=ackHHxtWoFHc&refer=china
by increasing capacity and exporting their way out of course
http://mpettis.com/2009/02/will-china-have-to-choose-between-social-stability-and-long-term-growth/
http://mpettis.com/2009/02/more-terrible-trade-numbers-from-china/
cheers!
You are giving the Asian countries far too much of a pass. China had no need to accumulate $1.7 trillion just to protect her currency. The same can be said about the trillion dollars accumulated by Japan and the hundreds of billions by other Asian countries. They were practicing mercantilism, the strategy of intentionally maximizing exports and imports in order to steal market share in world markets. And their reserve accumulations, unmatched by reciprocal US reserve accumulations, allowed them to do so.
The International Monetary Fund completely blew it. Article IV of the IMF agreement specifically requires that countries “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competetive advantage over other members.” Yet they did nothing.
You started your post by substantiating what I wrote back in October, first as a response on your blog, and then as a posting on my own blog, A worldwide depression started this week. In those postings I explained that the financial crisis predicted by Nouriel Roubini and the worldwide depression predicted by Richard Duncan had the same cause. I also correctly predicted the incompetent reactions by the Chinese and American governments.
Whoops. I meant to define mercantilism above as the strategy of maximizing exports and minimizing imports.
Wall Street Banks Are Worsening the U.S. Foreclosure Crisis
One million residences having fallen into foreclosure since 2006, and an additional 5.9 million expected over the next four years. One reason foreclosures are so rampant is that banks and their advocates in Washington have delayed, diluted, and obstructed attempts to address the problem. Industry lobbyists are still at it today, working overtime to whittle down legislation backed by President Obama that would give bankruptcy courts the authority to shrink mortgage debt. Lobbyists say they will fight to restrict the types of loans the bankruptcy proposal covers and new powers granted to judges.
However the skirmish ends, the industry’s contention that it has done as much as possible to limit foreclosures seems hollow. One program, Hope for Homeowners—which Bush officials and banks promised last fall would shield 400,000 families from foreclosure—has so far produced only 25 refinanced loans. Meanwhile, an already glutted market sinks beneath the weight of more foreclosed homes. Borrowers whose equity has evaporated have nothing to tap into if the recession costs them their jobs.
http://www.businessweek.com/magazine/content/09_08/b4120034085635.htm?chan=top+news_top+news+index+-+temp_top+story
DJC,
Don’t be fooled by the phony statistics propagated by the Chinese government. Brad is correct, the exporting countries are being hit far harder than the importing countries at the moment.
China’s huge stimulus plan largely consisted of export subsidies. It will do little to make a dent in their recession. Michael Pettis correctly dubbed it “Smoot-Hawley-with-Chinese-Characteristics.”
Check out my recent blog entry: China is in a recession and the IMF is in a dreamworld.
/truely/truly/
sorry to nitpick.
Howard Richman & Brad Setser,
Let’s make this perfectly clear. No one in this world owes anyone else a living. Americans don’t owe the Chinese any standard of living, nor vice versa. The financial assets of Pacific Rim Asian countries represent accumulated wealth from decades of hard work and diligence. The Chinese and Japanese build “real economic wealth” through industrial production and technology. “Eight of the top ten” US patent recipients last year were Asian corporations.
Moreover, the Chinese don’t practice “warship economics” by invading sovereign nations for their oil reserve wealth. Nor does the Chinese government have at its disposal, the Western IMF and World Bank; the institutions de facto operate as an appendage to the US Treasury Dept to loot and pillage the developing world. Under the Clinton-Rubin administration, the Indonesian economy was entirely looted and destroyed by Wall Street Hedge Funds that stole the $10 billion in “blood profits”.
Howard Richman,
First get your facts straight. China has some measurements to boost exprot. But the huge stimulus is to build more railroads and grids, and other infrastructures. Michael Pettis was wrong on this one.
Brad,
The way going forward is quite simple. As the profitability to export declines, it is time to redirect resources and talents to improve internal human capitals and reboot the domestic demand. It will be slow, but the process just begins.
The International Monetary Fund completely blew it.
… hence the funeral, but do not discount the OCC`s doodoo one bit.
basically you as well as eu both can not afford the “nationalization” thing.
t — not a nitpick, an embarrassing error, one that is now cached in google. the autospell check doesn’t work for titles, and i need it
Fatbrick,
How much are they spending on infrastructure, compared to last year?
How much did they increase their spending on the export subsidies that they agreed to completely forego when they joined the WTO?
How much will they spend on “science and technology” projects, such as building an inefficient aircraft production industry that will be protected by tariffs so that they won’t have to buy from Boeing or Airbus?
From what I have seen so far, they have no intention of doing anything that would help end a global depression caused by imbalanced trade.
Based on the recent performance of the Shanghai market, it looks like a lot of the Chinese gov’t stimulus is finding it’s way into the domestic equities market. I guess they can copy the US in more ways than aping our technology.
Oh please Howard,
The Chinese government is spending over $580 billion for railway, road, telecom and power infrastructure projects. Just the $30 billion for China’s telecom projects alone exceeds what Obama intends to spend on repairing the entire infrastructure across the United States.
In the labor intensive textile industry, the United States isn’t globally competitive. Period. If China didn’t exist, the situation wouldn’t be any different. Chinese export subsidies for textiles might impact India’s textile exports but that doesn’t impact the United States. The United States shouldn’t complain about an industry that wouldn’t exist without protectionist barriers.
As for Asian ventures into aircraft development, sorry that the Chinese aren’t following the Western Neo-liberalism script that developing world nations should expect to remain forever in retrograde economic development. It’s up to American themselves to invest in their collective futures by saving their capital instead of wasting it, upgrading the skills of their workforce, and developing new innovative technologies that the rest of the world wants to buy.
As the economic fiasco resulting from Wall Street’s creation of AAA-rated subprime bonds demonstrates, there isn’t any “long-term” free lunch in economics.
Brad,
I’m working off of BEA NIPA table 1.1.5, which shows “change in private inventories” of -$49.7bil. for Q3 and -$8.3bil for Q4. That contributes a positive $41+bil to the Q3 to Q4 change in GDP, but it’s still shrinkage.
More than two years ago i claimed Prof Roubini will be be proven too optimistic. At that time he was being ridiculed by many.Even many of my friends thought i was beyond hope.
In late 2006 i had a discussion with a well known journalist in Turkey and explained to him my predictions for the future. He was impressed and had a series published in Turkish daily Milliyet.In short he was claiming that world will go through a transformation and a new world order will emerge. This new world will be Asia centric and western powers will not cede their hegemony willingly.The catalysis will be financial crisis led devastation which will enable this transformation.
The unfolding events confirmed my and his predictions.There will be no decoupling. Everyone includig Russia and China will suffer but real and sustainable recovery will begin in Asia around 2012 and relative economic weights will drastically shift in Asias favor.
Howard Richman,
You did not seem to get it. The investment in S & T is the only way to rebalance the international economy. Why cannot China boost internal demands? It is because people have low income. Why do people have low income? It is because they are not as productive as workers in developed countries. Why is that? It is because the low investment in S&T. Why was there more S&T investment before? It is because people were poor and there was no expertise. Thus it is why there were FDI and open gate to build up the initial wealth.
DJC
Agree with your comments as they are driving to a question why would a “cohesive” Asia be needing the IMF or the WB?
It nurtures enough financial assets to establish its own lenders of last resorts , enough competence to launch its own bonds., enough experts to support all the technical functions.
DJC
The glaring fallacy in your 12:43 post is to assume that the economic stimulus of building infrastructure. I assume you have seen US road building where a few workers use large machines. Maybe Caterpillar will need to make additional machines but total labor used is small.
Perhaps you have seen third world road building, which is still mostly hand labor.With hundreds if not thousands of laborers on a project.This kind of Public Works projects has been around since the Pharaohs. As recently as the Depression the US used this in CCC. But we no longer do it, and given the shape we are in few non-immigrants could sustain that kind of labor.
DJC,
I totally agree with you when you wrote, “Let’s make this perfectly clear. No one in this world owes anyone else a living. Americans don’t owe the Chinese any standard of living, nor vice versa.”
That’s why I don’t believe it is at all wise for the United States to expect China to solve our imbalanced trade problem for us. The quickest way to solve it ourselves would be to adopt Warren Buffett’s Import Certificates plan.
Richman: Brad is correct, the exporting countries are being hit far harder than the importing countries at the moment.
Quite honestly, I don’t think that China is being hit nearly as hard as the United States, and I think China is going to find it much easier to get out of this mess than the US is.
China has one massive economic crisis right now. The United States has three. Because China has a fairly standard garden variety crisis, there is a fairly standard garden variety solution to that crisis. Expand credit massively to avoid unemployment.
The United States has a much more difficult time, because the standard garden variety solution to one crisis won’t work because of the other two. The US would like to massive expand credit, but it can’t because the banks are broken.
“The glaring fallacy in your 12:43 post is to assume that the economic stimulus of building infrastructure. I assume you have seen US road building where a few workers use large machines”
A reminder of a comment made by a native of India when thinking of his lawn to be mown in his native town « What shall I do purchase a lawn mower or hire ten of my compatriots and feed them for a less money ? »
I think there were some reports of economic recovery and market rebound in the 1930’s as well.
Recessions are particularly hard on manufactures. I was in US manufacturing during during the 1980-82 downturn which was not pleasant. And that was a self induced downturn.
So today’s manufacturing powerhouses are Japan, Germany and China. Japan’s and Germany’s numbers went into the crapper. I say China’s numbers are faked.
Sure China has big stimulus program. Don’t we all. And maybe they can employ lots of Chinese to lay railroad tracks (hey, worked in the US in the 1800’s), but squirting money into an economy never distributes itself evenly(I’m betting on a big resurgence of the treasury carry trade by banks in the US), so big sectors will still be hurting.
So I can’t see any reason why this should be a short recession, and lots of reasons why it would be a long one.
We may be able to monetize GDP up in the US(if we could just loosen up credit, or make it cheaper, or do away will that dumb requirement about paying it back), but that will still feel like a recession in spite of all the gleefulness we will experience in reading good economic stats.
Fastback,
I don’t begrudge China their investment. I begrudge them their policy of maximizing exports and minimizing imports, the strategy known of mercantilism. Mercantilism has the unfortunate side effect that it forces ones trading partners to borrow money to pay for imports, borrowing which eventually destabilizes their financial systems.
In his youth, Keynes thought what most American economists still believe — that “free trade” was always the best policy. Then he realized that mercantilist countries could gain an advantage that would financially destabilize their trading partners. Under a gold standard that destabilization happens more quickly.
As a result, during World War II, Keynes tried to set up post-war institutions that would keep trade in balance. Volume 25 of his complete works is completely devoted to this work. You can find it in your university’s library.
Keynes understood that balance is needed for sustainable growth in international trade. Unfortunately, economists since Keynes ignored his whole body of work between 1940 and 1945. Instead they set up international institutions that would gradually reduce barriers to trade without keeping trade in balanced. They thought that “free trade” was a substitute for “balanced trade”. They were wrong.
The big story for the next generation of economists will be what you’ve noted: this blistering drop in exports, over-reliance on same, failure to develop sufficient national and regional consumption. I expect a lot will be written about Germany because it’s an old economy that’s export driven with many clamps on domestic demand. (And how they’ve aggressively defended their niche approach.)
fatbrick: First get your facts straight. China has some measurements to boost exprot. But the huge stimulus is to build more railroads and grids, and other infrastructures. Michael Pettis was wrong on this one.
There is also an effort to get credit directed at small and medium business rather than at infrastructure projects.
Also, some cities have experimented with consumer vouchers. The local government issues you a coupon that must be spend on some product within a certain period of time.
The thing about the Chinese economy is that there is so much money saved during the boom, that it has a lot of options to figure out how to get through the bust.
Finally, the situation in China is much less bad in many ways than it was between 1997-1998. China has to deal with tens of millions of out of work migrant workers, but it had to deal with even more unemployment when the SOE’s were restructured in the 1990’s.
Also, I don’t think that the next economic crisis (and there will be another economic crisis around 2015-2017) will involve a current account crash. People will figure out ways of dealing with what happened with this crisis, changes will be made, and around 2015-2017 when the next credit bubble bursts there will be something completely different causing it.
If you argue that this crash was due to too much capital savings, too high exports, and too little regulations, then it is reasonable to assume that people will overcorrect and the crash of 2015 will be due to governmental overregulation, insufficient trade, and reserves that are too small.
Richman: Mercantilism has the unfortunate side effect that it forces ones trading partners to borrow money to pay for imports, borrowing which eventually destabilizes their financial systems.
This isn’t a good explanation for what is going on right now, because the United States has absolutely no trouble borrowing money right now. One other thing is that there would have been no real need to borrow money from China, it not for the Iraq War, which cost the US about a trillion. The other thing is that there would be much less need for borrowing from China, if tax rates on the wealthy were higher.
Richman: As a result, during World War II, Keynes tried to set up post-war institutions that would keep trade in balance.
Correct, but the theory behind those institutions was that to keep trade in balance while maintaining open trade forces government to undertake certain policies, namely avoidance of deficit spending.
The reason I don’t believe that China planned on an export driven economy is that the two key decisions that led to the drop in the dollar (namely the Iraq crisis, and the Bush tax cuts) were made in Washington.
If China didn’t exist and if you try to keep trade in balance while at the same time maintain large deficits, you end up back in the 1970’s with high inflation.
What about the idea of consuming what you can pay for not much of keynes more of S Alexander and for sure well recorded by Mundel
An excellent point. I hope you expand on this more, particularly how it might influence the US GDP outlook. Besides China and other far-east nations we can add Germany, Japan and possibly Canada to the cast of countries who were overly dependent on the US as importer.
Twofish:
“China has one massive economic crisis right now. The United States has three.”
What are these three crises?
It is interesting what you write about the next crisis in 2015-17. I think that a next big crisis will be caused by the too much US debt. The total private+public debt is about 55 trillion dollar, and only 12 trillion is held by foreigners. At the other end of every debt, there is someone who wants to spend this money in the future. But since nobody can pay back its debt, this huge amount of money will be missing in the future. I believe that the current crisis is caused by the financial system hitting the debt wall (it’s debt is 15 trillion). When everybody (consumers, companies, states etc.) hit the wall together, that will be the real big crisis.
Chris:”Besides China and other far-east nations we can add Germany, Japan and possibly Canada to the cast of countries who were overly dependent on the US as importer.”
Mexico too. Canada and Mexico are still among the top trading partners of the US.
Other problems for Mexico…oil production is slated to fall 30% over 3 years(that started a year and half ago). Not to mention the new oil price.
Plus our recent years of stimulus for Mexican construction workers has ended. Flows to Mexico, and the rest of Central America, from savings being shipped back home were a substantial line in US BOP data. That has ended.
plschwartz: The glaring fallacy in your 12:43 post is to assume that the economic stimulus of building infrastructure. I assume you have seen US road building where a few workers use large machines. Maybe Caterpillar will need to make additional machines but total labor used is small.
DJC: Chinese construction worksites aren’t as mechanized as their American counterparts. Worksites in China utilize a larger labor workforce. Labor is still realtively inexpensive in China compared to the cost of Capital.
AC:”It is interesting what you write about the next crisis in 2015-17. I think that a next big crisis will be caused by the too much US debt.”
You can bet dollars to donuts, which could be a leveraged bet by then, that it will be fashionable to be talking about the “Treasury Bubble”. If we make that long. And if we aren’t talking about inflation, or the worthless dollar instead.
Right now Japan holds the dubious crown with 180% debt to GDP. Most of Eurpoe is already at 80%-100% debt to GDP.
The US just committed to what looks like $14T in total USG debt. That is 100% of our GDP right now.
AC: What are these three crises?
1) banking financial system crisis
2) unemployment crisis
3) real estate foreclosure crisis
Right now these three crises are feeding against each other. no bank credit -> unemployment -> foreclosures -> no bank credit
AC: At the other end of every debt, there is someone who wants to spend this money in the future. But since nobody can pay back its debt, this huge amount of money will be missing in the future.
All money is fundamentally debt. Also, if you owe me a billion dollars and I owe you a billion dollars, then it is easy. We shake hands and poof, the debt is gone.
That actually is what happens when you write a check to pay for a credit card bill.
AC: I believe that the current crisis is caused by the financial system hitting the debt wall (it’s debt is 15 trillion).
I don’t think so. The more debt the financial system owes people, the better. If you have a checking account, that’s debt that bank owes you. The bigger your checking account, the bigger the debts.
It’s not the amount of debt, it who owes who. If you have people saving huge amounts of money in banks, that vastly increases the amount of debt in the system. This is not a bad thing.
AC: When everybody (consumers, companies, states etc.) hit the wall together, that will be the real big crisis.
Not really, If I owe you as much as you owe me, then we are even.
A large, truly global slump…
Nearly every economy is not just contracting but slumping…
Richman: That’s why I don’t believe it is at all wise for the United States to expect China to solve our imbalanced trade problem for us.
DJC: If the US government decides to impose 100% import tariffs on all Chinese products as both you and Brad Setser propose, that is perfectly fine. There isn’t anything the Chinese government can do about it. The US retains the largest military in the world so it can default on every obligation to the rest of the world.
The US government is already imposing ludicrous lead paint requirements on Chinese imports driving thousands of small manufacturers across China into bankruptcy. For the miniscule amount of lead found on some toy products, a person would have to literally ingest several pounds of paint chips to be considered even remotely hazardous. The non-tariff barriers on Chinese products are just another form of protectionism.
But at least in an overt US sponsored trade war with China, the Chinese PBoC can manage their own sovereign monetary policy without the US controlled IMF dictating what China’s currency exchange rate with the rest of the world should be set at.
Twofish: “Also, if you owe me a billion dollars and I owe you a billion dollars, then it is easy. We shake hands and poof, the debt is gone.”
Exactly! And since at the other end of most of the public+private US debt are Americans, the American people owe themselves 40 trillion dollars. It means that in the future they will have to pay themselves pension, medical benefits etc. The future has already been spent.
None of Geithner plans can solve today’s financial problem. The debt overhead far exceeds the economy’s ability to pay. If the banks would indeed do what Pres. Obama’s appointees are begging them to do and lend more, the debt burden would become even heavier and buying access to housing even more costly. When the banks look back fondly on what Alan Greenspan called “wealth creation,” we can see today that the less euphemistic terminology would be “debt creation.”
The problem for today’s financial elites is that it is not possible to inflate another bubble from today’s debt levels, widespread negative equity, and still-high level of real estate, stock and bond prices. No amount of new capital will induce banks to provide credit to real estate already over-mortgaged or to individuals and corporations already over-indebted.
http://www.globalresearch.ca/index.php?context=va&aid=12265
In response to my comment about the institutions that Keynes tried to set up after WW II, 2Fish wrote: “Correct, but the theory behind those institutions was that to keep trade in balance while maintaining open trade forces government to undertake certain policies, namely avoidance of deficit spending.”
You are incorrect about what Keynes was writing. He called on trade surpluses to do deficit spending and permitted trade deficit countries to limit imports, impose tariffs, and subsidize exports. See “Keynes: Trade surplus countries should stimulate their economies; Deficit countries should balance trade.”
Howard,
If the US wants to overcome Chinese “mercantilism”, why doesn’t it allow the economic downturn to depress American wages and make American producers competitive again?
Only Godzilla can save us now.
“He called on trade surpluses to do deficit spending and permitted trade deficit countries to limit imports, impose tariffs, and subsidize exports. See “Keynes: Trade surplus countries should …”
Déjà vu, the answer was available on Gogle
“Didn’t the Smoot-Haley Trariff Act have alot to do with it as well? We placed tariffs on international trade to try to “help” American “
a great big global slump.
congratulations to those who predicted it – but prediction has limited usefulness. easy to pick out those who called it correctly, afterwards. the trick is to pick them out beforehand.
free movement of capital is the villain. nothing links an irish hairdressing salon to a mexican mining company except that both may be linked into the international flow of capital. globalisation maximises trade – (irish biscuits going to italy pass italian bicuits going to ireland, in swiss tunnels) – and both are working on borrowed money. if globalisation continued, the next great global slump would be proportionately greater.
like a great ocean liner with no watertight compartments, a single bloated global bubble would subside all in one woosh.
the globalisation project : essentially exponential growth of consumption by an exponentially growing global population, is either a delusion or a fraud.
two prospects face the world in 2009. one is the g20 meeting in april. i read administration comments on chinese mercantilism as positioning for that meeting. they are not just academic musings.
the second prospect is that the globalisation process seems to attenuate relative earnings to a point which becomes politically non viable. political cohesion requires that earnings are more evenly spread through each society, even if this means a protectionist direction which makes that society as a whole less prosperous.
the ‘limits to growth’ are quite close. we will not know the statistics of peak oil, peak automobile use, peak soil, peak groundwater, peak food – except in retrospect.
you are all children. it is not what your analysis – that’s of a high standard – nor is it your harvesting of statistics. it is the deluded rubbish that you take for granted. the self evident benefits of a return to “growth.”
there is no consideration whatsoever of a stable earth economy. and yet there is a balance in nature and nature is ruthless in applying her own laws.
china (your favourite topic) can never achieve an american standard of per capita consumption – because in many commodities there are not enough resources in the world to support that. so the growth project is either a delusion or a fraud. if it is a fraud it is that the aim is to enrich, not china, but a small elite of the chinese nation.
i suspect a fraud, either deliberate, or perhaps partially subconscious.
people who think that economic progress ( i e more consumption) is inevitable are exactly like the poor deluded folk who thought that the whole world could enrich itself by flipping condos.
i think that the great contraction will continue for decades, interrupted by ‘bear market rallies’ each a little weaker than the last, each hailed as ‘the bottom’ and the ‘upturn’, only to disappoint.
perhaps a new style civilisation will arise in due course, based upon something other than mushrooming population, consumption and pollution, but not in our lifetime.
Rebel Economist asks, “Howard, If the US wants to overcome Chinese “mercantilism”, why doesn’t it allow the economic downturn to depress American wages and make American producers competitive.”
There are two answers:
1. Keynes would point out that wages are “sticky” due to contracts. As a result, allowing the economic downturn mainly produces unemployment, not lower prices.
2. I would point out that this allowing the economic downturn would not produce investment in America’s productive sectors, while Warren Buffett’s Import Certificates plan would. In fact, Buffett’s plan could get us out of the recession without need of an economic stimulus.
That is correct. China (Brad’s favourite topic) will never achieve an american standard of per capita consumption. However, within a decade or two, the GDP of China’s economy will most definitely surpass the GDP of the United States. For most of mankind’s recorded history, the Chinese economy was the world’s largest.
From Economist Henry Liu,
During the Clinton administration, Robert Rubin, widely regarded as the father of the strong-dollar policy, declared his aim of a strong dollar soon after his appointment to the Treasury in January 1995. Rubin understood that a capital account surplus is the answer for a current account deficit, based on economics worked out by Martin Fieldstein in the Reagan administration. A strong dollar is key to this capital account surplus – current account deficit coupling strategy, which is a centerpiece of dollar hegemony.
A new economic sector called financial services came into existence. This was the true meaning of the slogan “a strong dollar is in the national interest”. Dollar hegemony allowed the United States to levy a tax on the rest of the world for using the dollar, a fiat currency, as the reserve currency for world trade and finance. The livelihood of the world’s workers came to depend on US consumers’ appetite for debt sustained by loans from the underpaid workers’ own governments. Neo-imperialism works by making the world’s poor finance the high living of the world’s rich. It transcends the Marxist notion of class struggle and surplus value and capital exploitation of labor. In neo-liberal finance globalization, not just labor but even capital comes from the exploited.
What the Wall Street Journal calls mass capitalism would not have been half-bad if it were not for the fact that the hard-earned capital from low wage workers was squandered through fraud and Ponzi schemes on Wall Street. These new ventures financed by fund inflows did strengthened the US economy at first. But as the real economy in the United States did not grow as fast as the inflow of funds, because fewer and few things were being produced in the US besides the dollar, the excess funds soon channeled toward manipulation and fraud on a massive scale, resulting in financial scandals such as LTCM, Enron, WorldCom, Global Crossing, and thousands of less-known bankruptcies.
How will China rebalance its economy towards consumption when it relies on low wages to be an export platform?
Also, the ubiquity of export oriented economies in Asia make me wonder if cultural influences make this model in Asia particularly resistant to change.
“For most of mankind’s recorded history, the Chinese economy was the world’s largest.”
yes indeed. but for a long period of earth’s history the dinosaurs were the largest.
i think the global economy has to fragment into smaller units. we can’t afford another empire.
Really a slumping global economy may not be the worst of our problems. There are other things to worry about besides just silly self inflicted economic gaffs.
For instance, many years ago I came to the conclusion that the plumping up of America had to be the clandestine work of space aliens. The end goal ,obviously, is to harvest fattened up Americans and process them for the space aliens’ supermarket chains. I was never sure of the space invasion timing, but from the looks of things it could be near. And why wait for a bad economy to do damage to the herd?
So this gave me cause for concern over the years, but just recently I saw a Buffalo Wings eating contest in town here. The winner ate 220 Buffalo Wings in only 20 minutes! None of the participants wanted a main course after more than filling up on appetizers. So this got me thinking. We need a diversionary tactic when the space armada arrives, and what if we could convince the space aliens that Asians are like Buffalo Wings? Then the space aliens go after the appetizers first and Americans can preserve their lifestyle for a couple more years.
How? Well the secret is in in the sauce. No one would just eat a chicken wing. No reason to. But with the right barbecue sauce they are a big hit. So we need to develop Asian Sauce!
So right now I’m working on a policy paper for the Obama administration where I outline my recommendations and plan. I’m asking that funds be appropriated, either transparently or not, from either the stimulus bill or the defense budget. I’ll let that be their choice. Then we need to do R&D to develop Asian Barbeque Sauce for space aliens. We don’t know what they like of course, so we need to scientifically model a space aliens taste buds. Then develop a range of sauces to be sure we had something acceptable. Next we need to build a large sauce processing facility. We don’t know how many space aliens there are, so the bigger the better. This would create a lot of jobs which is a big selling point and I’m highlighting that fact in my report.
So that’s what I’m working on here just in case something serious happens that the government doesn’t have any control over.
When even the oh so hip iPhone crowd starts putting out applications to track the federal deficit…
http://itunes.apple.com/WebObjects/MZStore.woa/wa/viewSoftware?id=303821689&mt=8
…can the final reckoning be far behind?
(if link doesn’t work, just search on “deficit calculator” at the iTunes stores.
The problem for today’s financial elites is that it is not possible to inflate another bubble from today’s debt levels, widespread negative equity, and still-high level of real estate, stock and bond prices.
Many people over 35 also don’t understand how indebted the under 35 set is. There is little hope the consumer of the Millennium generation will match the boomers. Most college kids have $10,000 + in debt already at the age of 22. Frugality as environmentalism is bred by culture and necessity.
http://davidharvey.org/2009/02/why-the-us-stimulus-package-is-bound-to-fail/
very good analysis of the current developments from historical perspective.
@Gillies 4:47pm
Hear, hear!
We will be very fortunate indeed to stabilise our situation at the level of a steady-state economy.
The perpetual growth model (now in its death throes?) has been madness. RIP.
We ate the seed corn, it seems.
Twofish incorrectly states that China has only one crisis. It has at least two, exports and real estate. There was also a tremendous commercial real estate bubble in China, which is in the process of unwinding. It remains to be seen whether that will translate into a financial crisis, it may not because of the tremendous reserves the formal banking system was required to hold to ’sterilize’ the imported inflation from the currency peg.
China’s neighbors, however, are in no doubt worse shape. Their falls in exports and GDP have, to date, been much greater and most of them were not as financially strong. The Intra-Asian dynamic will be interesting, if China takes a leadership role they could win real dividends. If they continue to beggar they’re neighbors a trade war and political instability seem likely.
Brad–
Hi Brad–
2 reactions: I wonder where a case like Dubai fits within your hypothesis. You seem to be saying that, whereas in the 1990s, a state reliant upon capital inflows to cover external deficit (I’d put the Dubai of today in this bucket) was far more vulnerable than an export-led country, today we’re seeing the opposite (”It consequently is striking to me that the countries with the steepest falls in output in q4 have been the countries that are known for relying heavily on exports for growth.”) Most indicia suggests Dubai is hurting with the worst of them right now– do we just write off Dubai’s dire straits as sui generis? Or is Dubai perhaps a prototype for what might be a host of long suffering small, rich states (thinking here about the old SWF club, e.g., Singapore, etc) ?
(2) your best guess, what’s the denominator for China’s contraction? My own sense, should China continue at trend for another quarter, they will fail even the IMF’s revised growth estimates. If this is true, then — similar to the Kremlin’s need for oil to remain in the high $50/ barrel range– what is the magic GDP number necessary for the CCP to sleep comfortably? And how much of depends on RMB levels?
there was an uptick on the Michigan inflation expectation, GBP is smashing it’s head, baltic dry index is up in tandem with the shanghai index and ‘hope’ on 8% china 09′, gold rose, silver/platinum are following through and i guess it’s oil’s turning show coming up shortly..near you..welcome to part.1 of the series of the “Side-effects of the stimulai”..
I think whatever country is doing business when world demand collapses will show the largest drop in GDP.
The question should be: What is the level of GDP in each nation at the end of the first year of decline? My predition: Economies that are successful exporters will continue to have a higher GDP.
Do not waste your time feeling sorry for Germany, Japan and China. They have the productive capacity and the financial reserves to survive the downturn better than the U.S., despite a low rate of decline in the U.S.
“Also, the ubiquity of export oriented economies in Asia make me wonder if cultural influences make this model in Asia particularly resistant to change”.
We see export oreiented economies in Asia simply because Japan proved that to be the road to wealth.
I must agree with Howard Richman 3:49 pm. You are right on this point, Howard, but it does not seem like you are getting much support. Unfortunately, US in the thirties did not listen and the same will be true with China at the beginning of the 21st century.
RebelEconomist “If the US wants to overcome Chinese “mercantilism”, why doesn’t it allow the economic downturn to depress American wages and make American producers competitive again?” That would work. It would work if we all lived in an idealized world where people have no debt to pay or children to feed or rifles with which to dispose of economists who come up with ideas like that.
Those of you, including Betser, who expect or hope that export oriented economies to change are going to be disappointed.
That model has worked well for years. It will only cease working when the consumer oriented countries, like the U.S. and UK rebel and adopt national policies to aim for equal trade, not free trade.
The change of heart must come from the U.S. and the UK. But I will have to walk over the dead bodies of almost all “acceptable” mainstream economists to get there.
MakeMeTreasurySecretary,
My point (about driving down US wages) is somewhat rhetorical. Its purpose is to remind readers that the US is not entirely being undone by some dastardly Chinese trick, as some would have it, but partly because Americans are reluctant to cut their consumption in line with a changing world, in which consumption per capita will be more equal (along the lines that gillies describes). Mandatory balanced trade would do this (because it would raise the relative price of imports into the US), but I am against it because I believe it would introduce other undesirable distortions.
I have been expressing similar views on this blog for a couple of years now, because it seems to me that the US is living through a similar process to the UK back in the 1970s, when the response to losing ground to Japan etc was “it’s not fair”, “buy British” etc, and protectionist policies were a failure. Even now, there is not much appetite in the UK for protectionism. Better to face the world you really live in, and focus on adapting to it, rather than trying to stop progress.
If I were US Treasury Secretary, my fiscal policy priority would be spending resources on adjustment (eg grants to retrain US auto workers), mitigation of the consequences of adjustment (eg higher and longer unemployment benefit), and productive public investment (eg infrastructure, universal healthcare). I would raise much of the revenue from increased carbon and estate taxes, and not just extra borrowing. I am all for free trade, and would therefore tackle China about its closed capital account, but not its exports directly.
Geithner put his foot in his big mouth in more ways than one. Someone better give him a lesson in diplomacy along with the lesson he needs in economics. Giethner is easily the worst of Obama’s cabinet picks.
China is no more manipulating the Renminbi than the US is the dollar. What else do you call micromanaging interest rates, guaranteeing bank debt, engaging is currency swaps with Swiss Banks, and giving trillions of dollars to banks? Everyone of those things impacts the dollar. Moreover, there is no talk from this administration about Japan’s open threat to intervene in the Yen, or the Russian intervention in the Rouble.
I am not in favor of any of this of course, I am just pointing out the US pot is calling the Chinese kettle black. And when it comes to free trade, the US and the EU are among the world’s biggest hypocrites.
Moreover, Obama and Geithner better be careful of what they ask. China has already lost 20 million jobs, and it may easily lose 50 million more. Currencies of export based economies like Australia and Canada have been smashed. If China floated the Renminbi like we are asking, it could easily follow downward, and indeed I expect it would.
http://globaleconomicanalysis.blogspot.com/
China is doomed, because they will just try to boost export capacity and fail on stimulate domestic demand.
a friend of mine went to China and found an item costing $100, but in USA costing $30. and her friend is making only $300-400 a month in China.
you want China domestic demand or China domestic transaction rate to go up? try lower the price of good and increase the wage or salary which is non-existence in China.
can’t do those two things, then prepare more global slowdown.
USA will be doomed too. USA should be saving more and consume less, but under Obama, Geithner, and Democrats’ moronic leadership, USA will continue to spend with money its doesnt have. Democrat will tax and spend USA into Zenbabwe or Argentina.
Result: Imbalance trade continue to continue until global trade completely break down via trade protectionism -> global depression.
indian:
In thinking things thru here recently (in parallel with my Asian Barbecue Sauce Plan I’m working on for the Obama Administration), I’ve deduced that there is one more problem threatening global imbalance.
It has become clear to me that the space aliens long ago deployed a geosynchronous satellite over the Eastern hemisphere. This satellite has been beaming down xenotron rays which cause condoms to become defective.
Hence, not only is there a trade imbalance, but there is also a population imbalance!
Why the space aliens did this, I have no idea. They don’t teach this at Oxford, (I’ve checked), at least officially. So I’m sure Brad has no courses like this in his official transcripts.
I like you’re your balanced trade idea, and it would work even with eliminating currency altogether. For instance, exchange one US made Trojan for one India made pair of underwear. But if condoms are no good on that side of the world, then that doesn’t work, of course.
So I guess I’m at a loss for what the US, or even Britain, can do about this.
@ Cedric: This is with reference to your earlier comment that there is a large population in countries like China and other emerging and it’s not possible to employ those kids with US money.
Similarly there are plenty of US teenagers and early twenties people working in US marines and other military forces. How much money will the Chinese Govt. lend to pay salaries for them? It’s hard for foreign governments to pay salary for US soldiers, though they do provide a useful guard dog service in some cases.
indian:
They give condoms away for free in our high schools, so maybe that problem will diminish over time and become less of a burden for the Chinese government.
@ Cedric: How can people be so dumb? The US Government has too much debt and it can NEVER come out of its debt trap, no matter what. It just needs to default. Once the Us Government defaults, all the other sovereigns who’ve been accumulating US Treasury securities will also feel the pain equally. But the US military is today strong enough to discourage any invasions etc. That’s enough for now.
Once the USG defaults, people can re start their life in a new way. This time around hopefully they won’t again try a new blue dollar hegemony with Kissingerian ideas. Hopefully American people will be allowed to work hard and play hard, and become prosperous again with work and innovation, rather than with nuclear weaponries.
indian:”Now I’d like to hear how this boy benefits from US money?”
Simple. The Indian government needs to tax indian programmers at a 95% tax rate and redistribute the money to indian fisherman.
Not only only is the US rich in money, it is also rich in knowledge. We have extensive historical writings about red indians in early America, and what kinds of bad things happen when 10 indians go after the same fish.
These texts can be purchased thru the IMF and be used in justifying a 95% tax rate on indian programmers.
if USA do a direct default, then it will become Argentina. There will be nil appetite for lending by anyone. Why would A lend to B, if B can easily default? no lending = nil saving interest = nil saving. why would anyone desposit money into bank that give out 0% interest. why would bank accept any deposit with no plan to lend to anyone which can default like that? whole credit system will breakdown once USA default.
Cedric: Not only only is the US rich in money, it is also rich in knowledge.
In India we have a saying that a knowledgeable person is a like the branch of a tree which has a lot of fruit on it. The best way to recognize a knowledgeable person is to see how he behaves humbly, and bends down to the ground like a branch that is laden with fruit.
In the current situation the China Govt. is obviously the one with more knowledge, as you can see in the evidence of their polite approach to the crisis.
The moon-walking hyperbole is long dead. The US doesn’t have any advantage in any industry or technology which they can exploit commercially without endangering their global military superiority.
The British descendants have re built the US in the same model as their erstwhile empire. A Big Navy and Cannons, evil diplomacy and dependence on foreigners for the basic neccessities of life.
Cedric, thanks for bringing up the Red Indians. Apart from slave trading the former African people, the Britishers also slaughtered the Native Americans out of existence with rifles and cannons.
indian:”Your contention that kids in emerging markets are employed by US money isn’t accurate. Nobody employs those kids as a favor.”
I said we can’t possibly employ all of them.
So what the Indian government needs to do is employ them. They just need to print lots of ruppies (or whatever they are) to pay them all with. This way they can hold tax rates down for middle and upper class indians.
It’s so simple. Even Krugman regularly suggests this, and he got a Nobel Prize. In the US, fishing has largely become a recreation! And if you pay fisherman not to fish, or catch and release, you have something like the US agricultural support program.
Then there is health care. Hillary is finally getting to push her health care program in China now that she is State Department secretary. Everyone should have health care. India too, so grab Hillary while she’s over there. Another thing for fishermen to do!
So I’m surprised with the size of the emerging world’s population, that they aren’t all rich! Maybe that’s what the space aliens had in mind, but I wonder what went wrong.
indian:
Not true. India had a head start on everyone and blew it.
==========================================
Black Gold
Indulge me if I choose to begin with peppercorns, piper nigrum. One of the most ancient and popular of spices, pepper comes third only to salt and water as the most commonly used cooking ingredient in the world. Once so rare and precious that it was literally worth its weight in gold, pepper came to Europe after Alexander the Great attempted to conquer India in the 4th century BC. The Greeks used pepper as a medicine, digestive, and expectorant, but the Romans discovered that it added pizzazz to food. The main street through Rome’s spice market was known as Pepper St. and one of the gates of Alexandria, chief port through which pepper was shipped from India to Rome, was called the Pepper Gate. When the Visigoths besieged Rome in AD408, they demanded 3000 lbs of peppercorns in ransom; though the Romans reluctantly complied, the Goths added insult to injury by sacking the city anyway.
With the fall of Rome trade routes fell into disuse, and pepper gained in value. During the Middle Ages Venice and Genoa controlled the flow of pepper into Europe, and kept the price high; so valuable was it that workers at the docks and warehouses were forbidden to have pockets or cuffs on their clothing. It was used as currency, and dowries, rents, and taxes were often paid in peppercorns. “Peppercorn rent” meant paid in full, though today it means a nominal sum. One of the major gustatory uses of pepper was to disguise the taste of rotting meat in the days before refrigeration.
Desperate to break the pepper monopoly and thereby become rich, in the fifteenth and sixteenth centuries explorers like Vasco da Gama, Magellan, Drake, and Columbus set off in search of the Spice Islands – in essence, India, home of pepper. Vasco de Gama actually reached there, though his route was perilous, and Columbus’ Indians, of course, were on a totally different continent altogether. But the Dutch, British, and French set up East India companies, all in search of spices, primarily pepper. From its home in India (pepper actually derives from the Sanskrit pippali, berry), the spice was introduced throughout Southeast Asia by European and Asian traders, where it throve; it is also grown today in most tropical areas near the Equator.
“To cut a long story short”. . . .
indian investor – try harder. your word glut is leading me to import more verbiage than i really need. please sell your computer and give the proceeds to poor fishermen.
indian:
Just got back from the driving range. Working hard on the golf game.
But getting back to my train of thought here.
What I propose is that The Trojan becomes the new global reserve currency. Makes much more sense than peppercorns since the world is now flooded with Chinese refrigerators and is less dependent on peppercorns.
The US military will still be based overseas, but even today they train locals in the proper use of condoms. A little thanks is in order, I think.
P.S. Usually Brad would have posted a new topic by now. He must have gotten side tracked by Valentine’s Day?
Cedric: The US military will still be based overseas
ME: Let’s hope so, or else your little US dollar stashe will be complete toast. How does it pan out when USG finally defaults and issues blue dollars? Do you think they’ll give you a certain amount of blue dollars that will have the same value as the old green dollars in your stashe? And by when’re you expecting this? My guess is that the next (Treasury bond bubble burst) crisis will happen by around 2014.
Do you people think about the likely outcome?
Do leaders realize they are treating the consequences instead of treating the causes?
Just a thought. Things will get worse, how bad? REAL BAD.
The good news is after disastrous 2009 (which will be far worse than 2008), there is some hope of a new international system which will enable a balanced financial order…readers should be patient!
RebelEconomist, I agree with what you say at your 9:00 am post. We need to reduce the cost of business in the USA but how can we accomplish this extremely difficult task? I would not just focus on labor while disregarding the rest.
Sure we need to somehow reduce the cost of labor but this must be done in a politically acceptable way. The cost of labor must be reduced as the cost of living is also reduced. The latter would require that the cost of housing, debt servicing, transportation, health, and education be reduced. Now, did you get a letter from Kaiser Permanente that your premiums are reduced? Or from Yale, Iowa State, or UC Berkeley that your daughter’s tuition is reduced? Did you get a note from your mortgage provider that they forgive 50% of the loan? Did your town suddenly acquire an efficient and economical public transportation system?
Deflation would be a good thing in a theoretical sense but it is politically painful and slow. A dosage of “mandatory balanced trade” can help go through the adjustment. I agree that just saying “buy American” and crying “no fair” is not the way to address our long-term problems.
indian:
I plan on being all in Trojans just before the dollar bites the dust. Then I can pay Indian accountants to do my taxes.
Also, the Taliban will win, take over Pakistan, and the next thing they will do is nuke India with Pakistan’s nukes. Stop trying to worry the US about these things.
indian
Also, I’m quite confident The Trojan will work fine as the new global reserve currency. But “making change” is one detail I haven’t quite worked out yet.
As far as insuring that the Taliban nukes India first and not Israel, that may take a little more work on the part if the USG.
But it’s easy enough. We need to evacuate Israel. So we will just give the rest of Florida to the Jews. Plenty of empty houses their anyway. I’m sure Senator Lieberman’s aids have already drafted a bill to that effect and will introduce it in the Senate when the time is right.
And when will the time be right? Well, right now Obama has his wing of environmentalists to listen to and also his Peace wing. We have $45 production oil in the deepwater Gulf that is being blocked by environmentalists. Then have the Yucca Mountain, NV nuclear waste site also being blocked. The real environmental risks of developing domestic energy is small. The risks of defending the worst hellhole in the world with American bodies is very high.
So Senator Lieberman already got his bill passed to develop plug in hybrids and increase gas mileage standards. Next he needs to evacuate Israel to Florida. Then if Obama overrules the environmental wing we can have domestic energy production. Then we can pull the military out of the Middle East and give up on the Caspian Sea region and the rest of Central Asia.
Then the Taliban and Iran can have their way with the region and it will quickly disintegrate into a radioactive Stone Age. Russia and China can help with arms sales, as usual.
ITS scary how some are thinking of war and anarchy as means to end this crisis. WW3 from central asia?
REALLY, we should focus more on economics rather than politics here. though that is rather utopian, however sensible,logical,rational we try to be.
BAD behaviour/thinking is not the way to end this crisis, neither is it the way to flood this forum.
The Baltic Dry Index tripled recently, ships are lining up before the harbours in China again (so they told me), the stock market whipsaws itself slowly higher even without the participation of energy and financials, a lot of bad news but no severe sell offs anymore, Chinese banks granted almost $ 230 billion credit in January (double of December 2008), the price of oil has been in a consolidation phase since December, …
Don’t forget to keep looking, even when it’s dark.
geert: Don’t forget to keep looking, even when it’s dark.
Me: You might have noted that the stock markets have bottomed out.I called the bottom sometime back.
What the economists do is that they observe the economy and when they see that it’s recovering, they wait for maybe six months before stating that it’s recovering now.
If you’re a market participant you have be far ahead of the IMF folks to make money. The IMF folks make money in bribes from private investors when they write conditional lending reports. The ordinary market participant has to rely on their own wits to know when the economic direction has changed.
But what we’re seeing in the current market bottom is a temporary respite. In a few years the US Treasury bubble will burst. That’s when the real gala crisis will hit the world economies. So you have to go long now and wait for the outcome of the long war in Afghanistan.
As soon as you realize things are coming to a head there, you have to go short again. Such is the way of the stock markets.
HOWARD RICHMAN, If you had bothered to look at the Rmb4 trillion Chinese economic rescue package (why are we calling these things ‘stimulus’ packages?), you’d note that the vast majority, about 75%, is for education, healthcare and infrastructure, and that spending is multi-year.
As FATBRICK notes, so much for a “plan largely consisted of export subsidies.”
As for Warren Buffett’s “import certificates” plan, that would be the only way to come up with a working time machine, one programmed for a one-way trip to 1933.
DJC, Henry Liu is not an economist; but he is a nut.
Appropos the Brad Setser postulations of a continuing global slump:
If Brad Setser is right, then why have crude prices bottomed out with strong resistance in the $36-$38 range?
The reason is simple. Look at the UAE economy. The Dubai construction industry is toast. Dubai is relying on Abu Dhabi to bail them out, and Abu Dhabi isn’t doing so great. Abu Dhabi has much bigger oil reserves and sales, so hopefully Abu Dhabi will help Dubai out in some time.
Crashing the crude prices down will target the Russian forex reserves. Brad Setser thinks around $50 is the break even price for crude oil.Based on this type of calculation people must have thought that when crude slips to the $40 level, the belligerent Iran and Russia economies can be brought to their knees.
But the January 07-Jan 20 Russia-Ukraine Petroleum Gas dispute has shown the errors in the Brad Setser crude break even calculations.
Russia and Iran sovereign finances can be bolstered in the short run by hiking the petroleum gas prices, which they’ve already accomplished. The Russian economy has been under seige since June/July 2008 with crashing crude prices but they’re still holding more reserves than their external debt.
What all this tells you is that the OPEC countries can’t afford to crash the crude prices further to please Uncle Sam. Besides, the croaking of the IMF is of major importance. Neither Dubai, nor Korea, nor any other reasonably large sovereign is turning to the IMF for support. For obvious reasons.
So, the conclusion is that the global economies are now poised to recover in the medium term.
The Afghan problem isn’t a short 2 month battle.It’s a long war, with no justification other than US domination over Central Asia oil. Nobody with any common sense will believe that more than 7 years after 09/11, Obama is fighting terrorists in Afghanistan. The Afghan peace speech is a canard for gullible Kennedy-School Ph.D. Americans. The US has no plan to nab the real terrorists.
The new Obush foreign policy stance from Senator Clinton is dangerous; not for other countries that she is targeting, but for the United States. You get Geithner and Clinton playing diplomatic games with Chinese leaders who are much more capable and in a far stronger position than these kiddies, though Geithner is much more of a kiddie than Clinton is.
The US doesn’t have excessive amounts of national debt. Yes, if the US was a third world nation, it probably may have gone bankrupt by now, but the US is not a third world nation, and having your currency be the world’s reserve currency gives you options that Argentina does not have.
As far as “paying off the national debt.” The US has had a national debt since 1791, and England has had one since 1694. The debt will get rolled over, but there is no reason to think that it will ever get paid off. As long as you can convince people to keep funding the US government, you don’t have a problem, and there is no sign that the US government is not going to get funded.
Also there is no way that the US can practically default on its Treasuries without mass chaos. The problem is that US bank deposits are guaranteed by the same “full faith and credit” guarantee as Treasuries. If the US defaults on Treasuries, then it defaults on FDIC which means that checking and savings accounts are going to be worthless. It’s not going to happen.
Also in conversations that I’ve had with people that actually do Chinese policy, none of them think of exports has anything more than a stop gap, albeit an important one.
The two priorities of the Chinese government right now are 1) improve health and education services and 2) create a financial system that will support productivity gains. Among other things this means focusing spending on increasing credit for small-medium enterprises in the service industries.
The war right now is between »the Ponzi prolongers« and »Stop the schemers«.
While there clearly is no time to play games here (just look at the GROWING number of lags behind the curve) the former still hold the upper hand tho facing an increasingly uphill battle. To win their few additional months – for that is all they’ll ever win – they need to push gold down while regrouping for an attempt to loot the ssecurity. If they try to sell the housing slump by increasing public cash flows on the stock and then to nationalize – that’s two more wrong steps closer to the end.
By the time they do or do not succeed – all this will become largely irrelevant. They’ll end up looking surprised at the zero/starting point of this curve.
The latter either lack the coherent idea on how to implement their views or they don’t but fear to put the leverage to its use. Either way the blame lies therein.
By setting as priority “stability”, in absence of any time frame, you’ve just sold the wrong way forward as the only one. What’s left there of the market – will not buy.
Oh, it’ll buy the CDOs yes – but NOT the game plan.
Indian
I don’t care about the long term view in my investing strategy, though from an intellectual pov I do.
A good exit strategy and position sizing and off I go. I don’t even need an entry strategy.
MakeMeTreasurySecretary,
I am not talking about deflation. I am afraid that the price of US labour must fall in relative terms, implying that the cost of living must rise in relative terms. When you have 1.3bn Chinese, not to mention other countries, willing to sell their increasingly skilled labour for more consumption, I am afraid that, short of unprecedented technical progress or war to put them back in their box, the rest of us just have to accept less consumption for our labour. It’s more physics (continuity) than economics or politics.
Frankly, I think many of the issues that concern Brad and Howard are just details in that process. I dare say that even if China and the US had a common currency or even traded by barter, the big picture would turn out to be similar – a period of current account imbalances before both sides realised their position, followed by a crunch as the activities dependent on those imbalances have to stop, and finally a new world order with richer Chinese and poorer Americans.
What is needed are politicians who are sufficiently open-minded and honest to acknowledge the way the world is going, and to respond realistically to meet that challenge. While I am generally an economic liberal (in the British sense, like Adam Smith), I do think that the state is going to have to play a major role in coordinating the adjustment required. But judging by the polemic debate on US blogs such as Econbrowser, this looks unlikely for now, so the US situation may have to get worse before it gets better.
Indian Investor,
Having seen the first line of your comment above, I decided to read all of it, and it makes sense to me. Why don’t you carry on commenting, but more sparingly, so that you can give more time to writing clearly about your most important points, and do not overwhelm readers to the point that they switch off?
There was never a significant amount of Chinese structural steel in US infrastructure, but Chinese steel imports will be prohibited under US government legislation. The Chinese are the scapegoats once again ….
http://www.cbsnews.com/stories/2009/02/13/60minutes/main4801257.shtml
The package Congress passed this week includes a “buy American” clause that the steel industry fought hard for. It says any infrastructure project paid for with stimulus dollars must use steel made in the U.S.A., and not cheaper Chinese imports.
Indian investor come back and do not leave the table even after your thorough meiotic!
A « There isn’t any identifiable action for the US Govt. to ‘finance the current account deficit »
This blog has through past posts shown that USG as well as European governments can use and abuse the privilege of being main exchange currency issuer
TARP /TIC /Primary dealers /Derivatives (all evidencing threads have been provided )
It has been shown that not only deficit governments could establish a loop for self-funding purpose but they can as well manipulate the interest rates (a look at the history of the short term interest rates and long term interest rates i.e. yield curve will convince you that the US economy was in recession in 2006?)
b) « There is a continuous interpretation of falling trade levels as leading to a collapse of trade activities at this blog »
When reading many threads of this blog it does appear as obvious that trade margins were question but exchange volume. Very few comments were making reference to supply side economies but demand sided economies explaining for the shrinking demand altogether with solvency and credit hurdles.
c) « At this blog there is a theory being propagated that China’s accumulation of forex reserves is the main contributing factor to the US trade deficit »
There was a consensus that accumulation of forex is the accumulation of goods and services sold abroad
e) Brad Setser views the accumulation of USd in foreign central bank reserves as being ‘mercantilism’
One has to admit that the term of exchange could be satisfying Heckscher-Ohlin-Samuelson theory should the salaries in China and India be increased to the western levels. Suggestions have been made towards this end !
Indian : Dont go away, Please !
You have been refreshingly different and we were appreciative so far.
We are all here for knowledge. Nothing personal here dude.
Honestly, sometimes I used to wonder to myself if I’m imagining my whole primary dealer bank theory. And I used to think that if it were true then somebody or other would just come after me and finish me off.
But I just made a startling discovery. Here’s Dr. Simon Johnson, a former IMF Chief Economist, MIT Sloan Prof. and co-founder of baselinescenario.com, echoing my views in this interview (link below)
http://www.pbs.org/moyers/journal/02132009/watch.html
This tells you that I’m no tin hat guy, and what I saw as a Treasury Bond wheeler dealer conspiracy is quite accurate.
Albion, how refreshing to read your comments about wage levels. Why is no one working on this? I guess it is too easy and not challenging enough, right. I completely agree. Besides, the one way to achieve this is to impose Howardian controls on imports (EU too of course from countries with minimum wage levels below x and from countries importing (we do not want places like Spore slip through the net and give Indonesian workers an unfair advantage) from those countries and not imposing similar controls. This will no doubt increase Wallmart’s purchasing prices, and US consumer prices. If done properly (i.e. not in one stroke but taking say, 10 years), consumers will develop an inflationary mindset, investors will look for ways to employ more domestic labor, et voila. All it takes to get the Wallmarts out of the way and plus the few exporters facing competition (not Boeing and Airbus, as long as they agree to buy Ameripean, and if not), or the farmers (they should eat the surplus food they grow, that would reduce the number of farmers and their capacity to lobby in an environmentally friendly way.
Anyway, Albion, we are in the process of killing three birds with one stone: beat western disinflation; put money into Asian consumer pockets and create new western jobs for which skilled labour will have to be imported from Asia.
Brad,
I like this piece but it is very far from finished. Some speculative thoughts:
Assumption: next to a building slump in the US and some locations in China (pulling with it furniture, white goods etc, lots of things from Asia and Mexico) there is an acute fall in car sales. The declining car sales have three causes (in addition to stricter US consumer budget constraints caused by the disappearance of home equity lending: (1) uncertainty re the US automakers, causing retail buyers to postpone their purchases of new and second hand cars(2) collapse of the shadow banking system, the main source of finance for floor planning (3) reduced fleet owner sales (traditional buyers of US made cars wondering about their future purchasing strategy (as well as budget constraints).
In essence the car and housing related industries are going through a correction towards a new stable level corresponding to a world with tighter consumer budget constraints. The total collapse of housing production is not sustainable (population growth), so once the stock of unsold, but useful houses (there may be quite a bit that will have to be demolished) has been used up, new construction will resume, the earliest in locations with little overbuilding. The car industry if a different case, and probably carmaker will have to start increasing production witihin say, 6 months, but these may be different cars, and less suited to US production capacity. Given the financial situation of the US carmakers, they will not have the means to switch, despite gvt assistance. Not all carmakers are in the same situation of course.
Speculative explanation for declining Jap exports (and supplier countries), heavily concentrated in cars (and then especially higher end 4wd ones plus premium cars):
(Japanese) firms with pricing power (for instance Toyota and Honda) and strong cash positions prefer (i.e. voluntarily rather than being forced) to cut production temporarily, rather than enter into price wars. They know that they have superior customer equity and that their customers will not switch to other brands (the high end Germand are doing exacly the same) but simply postpone replacing. But they squeeze their suppliers. These suppliers have supply chains all over Asia and they squeeze those. Hence a voluntary production cut in Japan becomes an involuntary decline in demand for Taiwanese, Chinese and Overseas Chinese ( officially Thai, Malaysian, Indonesian firms) These people are encountering another feature of the crisis: weakened foreign banks (Citi, HSBC, RBS/ABN) all with reasons to increase their yields and avoid credit losses are dramatically tightening the terms for trade credit. Very few local banks can replace the group of less than 10 western banks who dominate this business. Normally these banks compete for every customer but now they are mainly concerned not to pick up lemons.
I am pretty sure similar mechanisms are at work in other industries: primary firms with pricing power reduce production, causing enormous stress in their supply chains, aggravated by forreign banks relying on state support and regulatory forbearance but with the tacit understanding that the home market gets served first.
This will stabilze somewhere in the 3rd quarter but at Western consumption levels commensurate with lower household debt and much more reluctance to borrow.
Hence it may well be that even when housing recovers (but home equity lending not), and cumulative stress from unemployment leads to even tighter budget constraints, Asian countries will have to consume more to maintain social stability, because the Western budget constraints have the same kind of effect as import restrictions. The longer this situation persists, the more consumer conservatism will become entrenched.
I have to admit I have a somewhat irreverent view of macroeconomics, but then they do call it the Dismal Science. So I think that some dark humor goes well with the Dismal Science.
But I do have quite a few years of practical experience with the economy in US industrial manufacturing, US defense industry, and finally the Information Age. Then I experienced the Housing and Financial Age as an amateur investor.
So in my view it’s a little inadequate to just view China as the only problem and whether we should call that mercantilism or not. I think it started with the Japanese Invasion of the late ’70s. The Plaza Accord of ‘85 helped(but I was already hiding out in the defense industry at that point)and Japan responded by moving auto manufacturing to the US and other stuff to Mexico. But then Korea, Asian Tigers and an emerging China followed. The thing about China that is scary is size. (I was back into the industrial world at this point, ultimately planning to escape to the Information Age)
Then in the Information Age we found out that indian programmers are “tradeables”. First we parachute them in to US companies on demand, then after getting on the job training, we move the jobs back to Bangledore.
Some here think this doesn’t work well with the vastly different wage/price/cost of living structures between the developed and developing world. You’re right, it is like mixing warm air and cold air and you get a thunderclap. Furthermore, some sectors of the economy get the full brunt of the onslaught while others are immune or even benefit from it. Notably health care, higher education (look at the inflation rates here) and government (look at size and public debt, and willingness to go on foreign misadventures).
But some of the accepted macroeconomic medicine leave me skeptical. For instance, if China raises the yuan by 30%, what’s to keep Chinese manufacturers from lowering prices in yuan by 30% if they are able to because of wages, productivity gains etc.. and are induced to because of local competition or monopoly buyers?
The thought of IBM raising salaries for indian programmers in Bangalore from $12K to $70K strikes me as even more unlikely to happen.
So I think the forces of globalization make emerging country living standards go up for some there, and down for developed countries.
There is some case to be made that unlimited supply of goods and services results in improved standard of living for all, but there are restraints in commodities, environment, safe deployment of capital, and equitable distribution of the benefits vs. who takes the hit in employment and wages.
I haven’t figured out the answer yet, nor come across it anywhere else.
RebelEconomist,
I am in agreement that standards of living will have to go down, in a way, in the Western World and particularly the USA. However, assume I have a house in the suburbs and two SUVs, my daughter is in Yale, and I pay for my son’s health care. I review my finances and I realize I must make major changes since I cannot afford this lifestyle. I am quite willing to make the transition. But in the USA, it is practically impossible to find an inexpensive condominium near public transportation, good schools, and inexpensive health care. The good life in America means paying a ton of money. Not as much in European and Asian countries, or in America 40 years ago.
Came across this unbelievable tidbit in John Mauldin’s latest e-mail newsletter. The euro hasn’t got a chance against the The Trojan.
======================================
“But European banks may be in far worse shape. Bruno Waterfield of the London Daily Telegraph reports to have seen an eyes-only document prepared by the European Commission for the finance ministers of the various EU member countries. The problem revealed in the report is an estimated write-down by European banks in the range of 16 trillion pounds, or about $25 trillion dollars! The concern is that bailing out the various national banks for such an unbelievable amount would push the cost of government borrowing to much higher levels than we see today.
As my kids would say, “Really, Dad, you think so?” Europe is somewhat larger than the US, so think what my gold-bug friends would say if the US decided to borrow $25 trillion to bail out US banks. The dollar would be crucified! The euro is going to get a lot weaker if bank problems are even half of what the report says they are. The British pound sterling is already off almost 30% and, depending on what the real damage is to their banking system, it could get worse.
Waterfield reports, “National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors — particularly those who lend money to European governments — have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.
“The Commission figure is significant because of the role EU officials will play in devising rules to evaluate ‘toxic’ bank assets later this month. New moves to bail out banks will be discussed at an emergency EU summit at the end of February. The EU is deeply worried at widening spreads on bonds sold by different European countries.”
Part of the problem is that European banks were far more highly leveraged than US banks. Some banks were reportedly leveraged 50:1. And they lent money to Eastern European projects and businesses which are now facing severe financial strain and plummeting local currencies.
Let that number rattle around in your head for a moment: $25 trillion. Even $5 trillion would be daunting. But the problem is that Europe does not have a central bank that can step in and selectively save banks from one country without taking on all euro zone member-country banks. Yet, as noted above, some countries may not have the wherewithal to save their own banks. It is reported that some Austrian banks are hoping that Germany will step in and help them. Given Germany’s problems, they may have a long wait.”
Quiet many rumors at distressed time !
It would be reassuring should the exposure in Eastern countries be the exclusive of european banks, though some like HSBC have a worring leverage when earmarking its own funds with its non performing assets.
Bloomberg
Several western banks asked about holding discussions,” Anatoly Aksakov, head of the association, whose 450 members include Citigroup Inc.’s Russia unit, Alfa Bank and VTB Group, said in an interview. “It was their initiative to have talks on this topic to look at restructuring the debts of several companies, so that everyone can be calm.”
Banks such as London-based HSBC Holdings Plc suggested meetings with Russian companies concerning their ability to meet obligations, said Aksakov, who is also a lawmaker in the lower house of parliament. Less than $100 billion of international debt, $15 billion of which is due this year, may need to be restructured, he said.
MakeMeTreasurySecretary writes: I am in agreement that standards of living will have to go down, in a way, in the Western World and particularly the USA.
I’m not. I don’t see any basic resource limitations, and if it’s a matter of finance, well we just change the numbers.
MakeMeTreasurySecretary writes: However, assume I have a house in the suburbs and two SUVs, my daughter is in Yale, and I pay for my son’s health care. I review my finances and I realize I must make major changes since I cannot afford this lifestyle.
I suggest that you should be mad as hell then. Over the last years we’ve seen huge increases in productivity and the richest 1% of the United States are making huge amounts of money fromm these productivity gains.
They were able to justify these salaries, with the idea that the wealth would trickle down. If it isn’t then something is very wrong, and nothing is going to change unless people get mad as hell and start holding politicians and economic leaders accountable.
[...] choque do dia veio do Japão, que registrou uma contração em sua economia no quarto trimestre de 2008 de -12,7% (taxa anualizada). A economia japonesa nunca se recuperou do ciclo de bolha seguida por recessão nos anos 90, e foi [...]
Twofish,
You don’t see any resource limitations? How about oil, food, fish, CO2 carrying capacity etc, etc? Granted, technology in the past has circumvented such limits to growth, but the world has never previously faced a challenge like 1.3bn aspiring Chinese before.
I am not sure whether the Gordon etc debate about the US treatment of quality improvements settled, but I was always a bit sceptical of the US productivity “miracle”.
ReformerRay responds:
“Also, the ubiquity of export oriented economies in Asia make me wonder if cultural influences make this model in Asia particularly resistant to change”.
“We see export oreiented economies in Asia simply because Japan proved that to be the road to wealth.”
I think this is true.
RR, RE and HR: We don’t need lower wages to get balanced trade, and there is no good reason that trade should be balanced, either multilaterally or bilaterally. That is, there is no reason to disallow net internaitonal lending. However, right now we have a global deficiency in demand, and policies to artificially domestic saving (currency interventions to deflate the local currency) are counterproductive and damaging to the global well-being. Yet, I fear that this will be the response of Asian countries to the current downturn.
MMTS Very funny quip about rifles and economists.
don: “We see export oreiented economies in Asia simply because Japan proved that to be the road to wealth.
This is hardly the case at all. Japan became an industrialized nation in the late-19th and early-20th century, and the economic model that it used was not particularly export driven.
A focus on exports helped Japan and Germany rebuild after World War II, but Japan was already a very industrialized nation pre-WWII. Also the export focus of Japan and Germany had a political element in that by making Japan and Germany dependent on export markets, it would help insure that they would be unable to conduct either an independent foreign policy or a pro-Soviet one.
China is not Japan. Export industries can only be a relatively small part of Chinese industrialization.
RebelEconomist: You don’t see any resource limitations? How about oil, food, fish, CO2 carrying capacity etc, etc?
If you go through the list then none of them present any fundamental barriers to growth or standards of living. It might change some of the way that people live (i.e. bye bye suburbia, hello NYC), you can find ways of having high standards of living within resource constraints.
RebelEconomists: but the world has never previously faced a challenge like 1.3bn aspiring Chinese before
Followed by 1.3 billion Indians and 1.5 billion Africans.
don: . However, right now we have a global deficiency in demand, and policies to artificially domestic saving (currency interventions to deflate the local currency) are counterproductive and damaging to the global well-being.
Actually they don’t. If you increase savings and this savings goes to either consumption or investment, this is a good thing. If the investment creates long term productivity, this is a very good thing.
The economy should save in the good times and spend in the bad times. However people’s invididual self-interest runs against this, and people tend to spend in the good and save in the bad, which increases the volatility of the business cycle.
Consumption is not demand.
Yes, the economies are down various percentages. But when will they stabilize and stop going down? May be after 15%. This looks like 1929 all over again. Hungry third world people will not be passive as they starve.
don: “However, right now we have a global deficiency in demand, and policies to artificially [encourage] domestic saving (currency interventions to deflate the local currency) are counterproductive and damaging to the global well-being.
Twofish: “Actually they don’t. If you increase savings and this savings goes to either consumption or investment, this is a good thing. If the investment creates long term productivity, this is a very good thing.”
Yes, actually they do. That is why Krugman (and the bulk of the profession) favor government spending over tax breaks to spur demand – because part of the tax break goes to increase saving. A policy to encourage saving now is most definitely detrimental to the global economy.
It is a sign of the sad times the profession is in that one can quote Nobel laureates taking a position opposite to that of Krugman.
And I’m sure you could find some that would argue that Japan’s export-led growth model was not a template for other Asian economies, but they would be equally mistaken.
don: Yes, actually they do. That is why Krugman (and the bulk of the profession) favor government spending over tax breaks to spur demand – because part of the tax break goes to increase saving. A policy to encourage saving now is most definitely detrimental to the global economy.
I very strongly disagree. If you increase savings and those savings go into gold bars or treasuries, this is bad. If you increase savings and these savings go into starting new businesses and creating jobs, this is good.
What matters is not the amount of savings, but what happens to those savings. If people start saving more money, and those savings go immediately to create new businesses and education, this is good. The problem with broken banks is that without good banks, the savings gets absorbed fixing old problems rather than going into new things.
The reason you want to encourage savings is that policies that encourage savings take several years to establish, and you can’t just switch on and off marginal propensity to save.
Don: And I’m sure you could find some that would argue that Japan’s export-led growth model was not a template for other Asian economies, but they would be equally mistaken.
Facts are facts, and people who claim that East Asian nations copied Japan just don’t understand economic history.
The orthodoxy in economic thinking in East Asia was import substitution untilthe early 1960’s, and Taiwan moved out of import substitution to export growth because it didn’t have any other choice in the matter. Taiwan didn’t have domestic capital to fund intensive import substitution, so it had to move to an export oriented economy for lack of any other alternatives.
Most of Japanese growth happened in the late-19th century and early 20th, in which import substitution was the favored system.
These are just facts.
This also misses the point that the Japanese economy looks very little like the South Korean economy, the mainland Chinese economy or the economies of Hong Kong or Taiwan.
Brad
heard the latest about the korean economy? wpould have thought the slight easinag of the yen situation would have solved the repayment pressure (considering many korean firms actually financed their loans in yen last year). Rumours shaking the markets revolve around the possibility of a currency crisis engulfing the koreans, which brings to mind the question, could and would the japnaese and chinese come to the rescue in meaningful time. Yves’s highlighting of eastern europe’s pre carious state was certainly alarming, one wonders if the eurozone might not be dragged in further by the currency crisis that seems to be enveloping the region. Looks like the credit crisis has not just developed into a global financial crisis but rather into a financial chimera.
apologies, by region was refering to the eastern european region
Twofish,
You say “Most of Japanese growth happened in the late-19th century and early 20th, in which import substitution was the favored system. These are just facts.”
I am sceptical, but this is potentially interesting. Perhaps you could point us to said facts.
The debate about stimulus between Krugman and Fama etc was adversarial and unproductive, and I would be interested in having a civilised discussion here about it. I thought Krugman did a poor job of answering Fama’s point about where the extra output is supposed to come from, but one has to respect the empirical evidence that stimulus does seem to increase output. The trouble is that it seems to be difficult to have a scientific debate about this issue because any question is taken as a partisan position. I thought that Clive Crook in the FT was spot on about the present dysfunctionality of academic economics.
sorry brad my post got lost again coz of the stupid question …
Hi rebel.
I personnaly see nothing surprising in the present crisis.
Long live India Brasil and France.
Socialism is up, free market capitalism is out.
Long live plannification, sustainable growth, energy economics. Death to hedonics.
Let us have huge lay offs in the economics department globally.
Finally the great upheaval is coming. The foolishness of past growth is revealed.
Twofish, do you argue that the yen was not deliberately undervalued in much of the postwar period? That is the real question. Currency manipulation both encourages exports and discourages imports.
The debate over the issue of whether saving should be encouraged in the present economic environment is not a real one and shows a very frustrating lack of economic understanding, more so when given credence by Nobel laureates in economics. Krugman is exactly right on this point. Fama, who recently espoused the idea of fiscal ‘crowding out’ (the counterpart of Twofish’s view that it is a good idea to encourage saving in the current environment) should be deeply embarassed. Fama stepped out of his areas of expertise and made a very basic blunder. He has made significant contributions to finance, and he deserves great respect when he talks about the correct way to structure bank bailouts. But the arguments he presented showed that he was completely unaware of a substantial body of knowledge in the area of macroeconomics. He simply repeated an old argument (called the “Treasury view”) that has been thoroughly discredited.
don,
So, discredit the treasury view then. Ad hominem arguments are not convincing.
As simply as I can, actual saving equals actual investment, but that is no guarantee that desired investment will equal desired saving. If actual saving grows and forces actual investment to exceed desired investment (people don’t buy, so inventory is left on shelves), then business cuts back on output, forcing income (and actual saving) to decline. This is the so-called paradox of thrift.