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The fall in China’s exports has now caught up with the fall in China’s imports

by Brad Setser
March 11, 2009

China has now released its February trade data. Andrew Batson of the Wall Street Journal summarizes:

China’s customs agency said Wednesday that merchandise exports in February plunged 25.7% from a year earlier. That is one of the biggest drops on record, and extends the 17.5% fall in January for a fourth straight monthly decline. Imports declined by a slightly less dramatic 24.1%, thanks in part to government spending, which other data also issued Wednesday showed picking up in February. That left a monthly trade surplus of $4.84 billion – the smallest in three years. The number was just a fraction of January’s $39.11 billion, reversing a string of record surpluses in recent months.

But looking at the February data in isolation is always risky. As Macroman notes, the timing of China’s new year celebrations has a large impact on the y/y data. To avoid this, look at the combined data for January and February.

Monthly exports in the first two months of 2008 averaged $98.5 billion. They averaged only $77.7 billion in the first two months of 2009. That is a 21.1% y/y fall.

Monthly imports in the first two months of 2008 averaged $84.5 billion. They averaged only $55.7 billion in 2009. That is a 34% y/y fall — though one no doubt influenced by the large y/y fall in the price of oil.

Not good, in any way. China is importing as much in 2009 as it did in 2006. And it is exporting just a bit more.

After soaring for most of this decade — the pace of China’s export growth clearly turned up in 2002 or 2003 and then stayed at a very high pace — China’s exports are falling back to earth. The surge in China’s exports could prove to be as unsustainable as the rise in US (and some European) home prices. They might end up being mirror images … as Americans and Europeans could only import so much from China so long as they could borrow against rising home prices.

China trade surplus for the first two months of 2009 was close to $44 billion — well above the $28 billion registered in the first two months of 2008. Nonetheless, there is now at least some evidence suggesting that the q4 rise in China’s trade surplus has ended. As the following chart shows, the 12m sum of China’s surplus has stabilized while the rolling 3m sum has turned down.

However, the downturn in the rolling 3m sum doesn’t mean much. China’s surplus usually falls for seasonal reasons in the first quarter of the year. The real test is still to come …

The fall in commodity prices and a (likely) domestic slowdown suggest a rise in China’s surplus.

The dollar’s rise — and the resulting real appreciation of the RMB — and the slowdown in global growth by contrast suggest a fall in China’s surplus.

The balance between these competing forces isn’t yet clear, at least to me.

80 Comments

  • Posted by adiemuso

    u were tryin to say exports catching up with imports?

  • Posted by Howard Richman

    You made a brilliant point when you wrote that the surge in China’s exports mirrors the surge in house prices among China’s importers, with both being unsustainable. The two were mirror images: The house price bubble was fed by the Chinese loans that caused their export surge. Mercantilism has the problem that it eventually bankrupts its customers which spoils the market for its products.

    As Keynes pointed out in his writing during WW II, only balanced trade is sustainable. He tried to set up post-war institutions that would keep trade in balance, but we got the WTO instead.

    Don’t miss the biggest story that happened yesterday. Bernanke fired a shot across Lawrence Summers bow.

  • Posted by AO

    Brad,

    Another issue that needs to be analyzed going forward with Chinese exports to the western world, is how other export oriented nations ‘beggar thy neighboor’ policy will effect Chinese exports-imports.

  • Posted by bill j

    This is the re-balancing of the world economy in real time.
    If you account for the price falls – I’ve read estimates of -20% for imported raw materials in Q1, then the quantities of raw material imports are the same as last year (more or less) but now significantly redirected away from exports. (Although bear in mind that the falling produce price index now, will have been offset the nominal decline in dollar value of exports – although by nothing like the same amount – too.)
    If China is to significantly offset the present collapse in Western demand this is how it’s going to do it, through state directed fixed capital investments boosting its domestic demand.
    In terms of the health of the capitalist system, this is just what the doctor ordered.

  • Posted by K T Cat

    And the money to fund our debt binge is going to come from where now?

  • Posted by bsetser

    KT Cat:

    a) China’s trade surplus remains large, and on a rolling 12m basis close to a record

    b) but it is far too small to cover the fiscal deficit, most of which necessarily will be financed domestically. that is the logical result of a 10-12% of GDP fiscal deficit and a 3-4% of GDP current account surplus. the government is borrowing far more than the countryis borrowing from the rest of the world

    c) we should welcome a world where growing Chinese imports (and rising US exports) support global growth, allowing the US to run a smaller fiscal deficit w/o shortchanging global demand.

    the notion that the US needs China to run a large surplus b/c it needs Chinese financing is false; the adjustments that produced a smaller chinese deficit would create a basis for global growth that would allow the US government to borrow less.

    Admiemuso — yes, i flubbed the title

  • Posted by Michael Carroll

    I recall, with some wistfullness now, a few years ago when a post like this would unleash a torrent of nationalistic counterpoints from China boosters. I’m made a bit nervous by the relative silence.

  • Posted by Indian Investor

    China doesn’t care about exports anymore – they’re going to internationalize the Yuan pretty soon. So, there’s no need for China nationalists to grieve over the issue of falling exports.
    China is offering to give away dollar loans if only somebody can give them Panda Bonds. Their problem is not to end up loosing too much on their stockpile of Treasuries and Agencies. The rest of their strategy is obvious.

  • Posted by baychev

    brad,
    you still do not grasp the idea of fixed costs! all government spending is a fixed cost for the fiscal year. declining tax revenues from the past couple of months point to declining profit margins. this as well has alot to do with fixed costs at private businesses.
    but back on the public fixed costs: all gov’t fixed investment, oil, transportation equipment, export tax rebates, subsidies to chinese banks, subsidies to unprofitable public factories, loans to private businesses that partake in the stimulus program etc. are a drain on the fx reserves.
    now more on the fx reserve accumulation: many big mainland businesses are run out of HK and the profits even if not repatriated are private and the gov’t cannot put a hand on this fx.

  • Posted by jonathan

    I came here from MacroMan’s post and was pleased to see you provide additional material.

    I wonder about a point you’ve brought up and which MM discusses as well: the internal Chinese bubble, particularly in real estate (both residential and commercial). While they were pushing goods out the door, they were pouring a lot of concrete at home. What is it now – like 8 of the 9 largest malls are in China?

    So it looks like there may have been a double bubble – which is also a kind of gum, not my favorite, lost its taste fast – and now I’m waiting for the effects of that one to be felt, with a (vague?) hope that they throw enough money at their own people that internal demand levitates.

  • Posted by Indian Investor

    I had several friends working in China for months who came back and recounted thier tales before. The most amazing thing they describe is the difference between the way Chinese build infrastructure versus the way Indians (don’t) build it.
    In China the Government has a great deal more leeway to identify barren areas for development. Suddenly some Committee or other marks out some piece of land for development. Then they order everybody to go and build highways, power, water supplies, etc and erect big malls, complexes etc. All this while, there’s only building happening there – no people, businesses, etc.
    Once all this is done the Government “invites” some people, preferably foreigners, to utilize the newly built infrastructure. Soon, the malls, office buildings, etc get occupied. Then residents come to the area, and everything grows and multiplies. This is the Chinese idea of a “Special Economic Zone”.
    China has experienced massive growth in outstanding credit, both to the household sector and non banking corporations till January 2009. And their employment generation from fiscal stimulus is much faster because of their faster execution of their infrastructure ideas. They’re building more bullet trains and locally manufacturing civilian aircraft, militarizing more, giving sops for migrant workers to move to rural areas and set up small businesses, etc.
    Now nothing can stop China. China will soon set up a Samudragupta Empire, spreading across South East Asia, dominating the East and South China Sea, and large parts of the Indian Ocean and the Western Pacific.

  • Posted by Cedric Regula

    Howard

    Here is Bernanke’s whole speech given yesterday at…the CFR!

    http://www.federalreserve.gov/newsevents/speech/bernanke20090310a.htm

    He starts out talking about global imbalances being at the root of the problem. However, he doesn’t mention any possibility that Fed monetary policy had anything to do with it. Just that the US got deluged by foreign dollars that for some reason didn’t get invested well, but no mention where the dollars came from in the first place (N. Korea counterfeiting, would be my guess). So I thought that was a rather humerous omission coming from someone whose middle name is “helicopter”, and also should have some knowledge of what Greenspan was doing as well.

    But the rest of the speech was a rather disappointing discussion of the financial crisis, and the need for future reforms. I liked reading Volker speeches better. Volker seems to be coming from the direction “if you want a bridge, design a bridge.” Bernanke seems mired in academic analysis paralysis, telling us we have a great big Rube Goldberg Machine, and with some tuning, transparency and loads of supervision we can get it to work like a bridge. Seems to me that will be a work in progress forever.

    I hope he was making a joke when he suggested Congress as a possible “systemic risk authority”.

    While I was reading the paper I was hoping there would be a Q&A period at the end where CFR could ask like questions like “What do see the Federal Reserve’s job being during normal times?”. But no. But at the end Ben did touch on the periphery of that question. Sounds like he thinks they wait for financial crisis and shocks, then grab trillion dollars bills and mope up the mess. Said the Fed had a long tradition performing this job.

    I guess I can see how he is confused when we have lenders, loan securitizers, broker dealers, insurance salesmen, and commodity traders all being the same company. So it is difficult to determine whether it is the Fed, SEC, commodity exchanges, or state insurance regulators that are responsible for oversight, doing it from within their respective departments of the multinational organizations. But then earlier in the speech he also inadequatly touched on “too big to fail” as well.

  • Posted by test

    test

  • Posted by Twofish

    Carroll: I recall, with some wistfullness now, a few years ago when a post like this would unleash a torrent of nationalistic counterpoints from China boosters. I’m made a bit nervous by the relative silence.

    The world has changed.

    The part that usually set Chinese nationalists off was not the “China has lots of economic problems” but the second part of the lecture which was “China should copy the United States political and economic system and if you don’t think that way, you are obviously a brainwashed stooge of the Communist Party since obviously Americans know how to run China better than Chinese do.”

    The second part of lecture has disappeared, so these discussions no longer have the nationalistic edge that they once did.

  • Posted by Twofish

    Investor: China doesn’t care about exports anymore – they’re going to internationalize the Yuan pretty soon.

    That’s not going to happen for decades. My guess is that the current crisis is going to make it *less* likely that you’ll see the yuan as an international currency any time in the next ten years.

    Investor: Suddenly some Committee or other marks out some piece of land for development.

    It’s actually much more messy and more chaotic than that. Land development in China is a frightful mess with protests, payoffs, corruption, and empty malls and office buildings.

    There are only two things that have kept the mess from become a disaster. The first is that there is some fundamental demand as people move from rural areas to cities. The second is that the government tried really, really hard to keep the banks from becoming overleveraged. So when real estate blew up, it didn’t kill the banks.

    Investor: Now nothing can stop China. China will soon set up a Samudragupta Empire, spreading across South East Asia, dominating the East and South China Sea, and large parts of the Indian Ocean and the Western Pacific.

    Good grief I hope not. Imperial overstretch can wreck an economy. China has enough domestic problems to worry about to even think about any sort of political or economic expansion any time in my lifetime.

    As far as being a global power, China has one huge disadvantage over the United States which is that most people living in China are Chinese, whereas the United States has people from just about everywhere.

  • Posted by Twofish

    Investor: And their employment generation from fiscal stimulus is much faster because of their faster execution of their infrastructure ideas.

    Employment generation in China is fast because Chinese politicians live in a constant state of terror at being forces from power. Not that this is a bad thing…. Fear focuses the mind.

  • Posted by Sinomania!

    @Twofish

    My guess is that the current crisis is going to make it *less* likely that you’ll see the yuan as an international currency any time in the next ten years.

    What do you think is behind the move to settle trade in Yuan? It is expanding from Yunnan cross border trade to Hong Kong now (heard on bloomberg).

    Isn’t the China export link to middle class American and EU homeowners a bit oversimplified? Mortgage equity extraction was big in the USA, UK, the Netherlands, but I think much less so in the rest of the EU. The Panic of ’08 definitely began a major correction in global trade. But couldn’t China’s efforts to develop markets in Eastern Europe (the big container port development in Greece, for example), the Gulf Cooperation Council countries, Latin America, and ultimately Africa, blow a new Chinese export bubble?

  • Posted by Indian Investor

    Twofish: Imperial overstretch can wreck an economy

    Me: Imperial overstretch doesn’t start for about fifty years or so, when the Empire builders get complacent and arrogant. I didn’t mean that China doesn’t care about exports at all now; they will just focus on getting the imports needed for their domestic growth. They’ll exchange their work and expertize for those imports, and also have some combination of RMB settlements.

  • Posted by Howard Richman

    Cedric,

    You are correct that Bernanke starts his speech with the topic of trade imbalances, but then doesn’t continue it. As you noted, “he doesn’t mention any possibility that Fed monetary policy had anything to do with it.” I also agree with your assessment that “the rest of the speech was a rather disappointing discussion of the financial crisis.”

    My guess is that he added the first several paragraphs to his speech as a direct response to Summers’ Financial Times interview. That’s why the speech is so disjointed.

    My assessment of the Fed’s mistake with money supply is different from yours. I have a rare point of agreement with Ronald McKinnon. We both think that Greenspan blew it big time at the time that the Asian Tigers currencies collapsed.

    If he had offered them the currency swaps that Bernanke offered to South Korea and many other countries in October 2008, he could have saved their currencies from collapsing. Instead he simply stimulated U.S. money supply afterwards, so that U.S. consumers could pull the Asian Tigers out of their post-crash recessions.

    McKinnon understands a basic truth: If the world is to be on a dollar standard, than the United States must increase its money supply to keep up with international transactions. But he misses another basic truth: If the United States allows foreign dollar reserve buildups that are not matched by U.S. reserve buildups of foreign currency, then the United States suffers a trade deficit which takes away investment opportunities in American production.

  • Posted by seatrus

    While it is unlikely that RMB will become an international currency anytime soon, the possibility that it will become a regional Asian currency cannot be entirely dismissed.

  • Posted by Dale C.

    bsetser: as Americans and Europeans could only import so much from China so long as they could borrow against rising home prices”

    I hate to say this Brad, but, well, DUH!!! I thought this was obvious.

    Anyway, I was arguing here weeks ago that Chinese exports would fall off a cliff, and that Chinese imports are not just always a fraction of Chinese exports, and would therefore not fall proportionately.

    The result? The Chinese will not have a whole lot of extra dollars to buy the Treasury bonds the US government is issuing. This will cause the Fed to buy Treasury bonds directly, thereby debasing the currency.

  • Posted by Twofish

    seatrus: the possibility that it will become a regional Asian currency cannot be entirely dismissed.

    Even this is probably not going to happen within the next three to five years. For this to happen China would have to lift capital controls, and that is not likely to happen quickly.

  • Posted by Twofish

    Indian: Imperial overstretch doesn’t start for about fifty years or so.

    Psychological overstrech can start very quickly. Look at Japan and Southeast Asia in the 1990′s.

    Sinomania: What do you think is behind the move to settle trade in Yuan? It is expanding from Yunnan cross border trade to Hong Kong now (heard on bloomberg).

    I don’t think it means much of anything.

  • Posted by Cedric Regula

    Howard”My assessment of the Fed’s mistake with money supply is different from yours.”

    Doesn’t sound that different. I noticed ever since Greenspan raised interest too quickly in 1994 and caused international repercussions, that he has been lowering them quickly in response to financial crisis anywhere, tho I would guess his first reason was to provide liquidity to any distressed financial institutions, then secondly have the US consumer consume the affected region back to health.

    On this one “…the United States must increase its money supply to keep up with international transactions.”

    That is classic monetarism as applied to a local economy. I’ve suspected the US has been getting away with that for a long time, especially from the looks of M3 minus M2, back when they still kept track of M3.

    But in a local economy the profit part of trade gets invested in local savings and investment, and in the local currency. The fact that internationally we are getting a huge buildup in foreign dollar reserves implies we grew the international money supply too much. Just greasing the wheels of international trade shouldn’t take that many dollars because they are in very temporary use if only used for that purpose.

    Your point being that they didn’t buy American goods with it.

    I’ll re-iterate that the Fed needs to pay attention to what they do, and if we find that other actors aren’t doing what the Fed hopes they should do, resolve that in a direct way, and then have the Fed worry about adequate money supply when it’s needed.

  • Posted by greg

    So China’s export finally catches up with the collapsing global demands. With US current account deficit falling and saving rate going up to 5%, and exports from Germany, Japan and China falling precipitously, the market is doing its work of correcting the “imbalance.”

    I don’t expect the global trade to grow much at all, if it’s not falling, in the next few years.

    One of the growth engine of this Chinese economic juggernaut has just finally stalled, so the natural question is: what’s next for the Chinese growth story?

    Brad has once asked: China says it would address its economic structural problem since 2004, why didn’t it happen?

    The answer is simple: the export was booming, growing 20-30% a year since 2003. It was much more difficult to address the internal structural problems when it was so much easier to export. As much as people believe in Chinese government’s centralized power, economic development and growth are actually more locally-driven in China.

    This global financial and economic crisis has its silver-lining: it will make building consensus much easier. It will force China to address the structural problems and deficiencies in its development model head-on.

    I never believe that Japan or Germany is in the same league as US as an economic power, not just because their small size. China is not going to grow into an economic superpower by following an export-driven model. It would need to develop its vast and deep domestic market in order to be in the same rank as the US.

    So coming back to the question of “what’s next?,” the answer is it’s in the interior development and urbanization.

  • Posted by CLR

    Has anyone calculated the AR(12)MA(3) coeficients?

    I am curious about the size of the bounce.

    Brad,
    If you have the data, I can run some quick numbers. Also, if you have exports from Japan and Korea, it might be interesting to see if the global supply chain is norming to a new lower level or still in free fall.
    CLR

  • Posted by greg

    Indian Investor: China has experienced massive growth in outstanding credit, both to the household sector and non banking corporations till January 2009. And their employment generation from fiscal stimulus is much faster because of their faster execution of their infrastructure ideas. They’re building more bullet trains and locally manufacturing civilian aircraft, militarizing more, giving sops for migrant workers to move to rural areas and set up small businesses, etc.

    Let’s recall what China did in the ’90s and after the Asian financial crisis in ’97-’98. It restructured its state-own enterprises, closing and consolidating tens of thousands companies, laid off 20 – 40 million state company employees. Many large state-owned companies went public since. It bailed out its large state banks, injecting more than USD 100 bn to recapitalize these banks and striped them off bad assets. All state banks are publicly-listed and enormously profitable. It embarked on a large spending program, focusing on infrastructure particularly expressways. In slightly over one decade, China has built the world’s second largest expressway system after the US.

    This time around, China will again invest huge amount in infrastructure, but it will be both in physical and social infrastructure. The financial crisis just accelerated the decision process.

    Take physical infrastructure. This time, the focus is on railways, especially high-speed railways, and metro systems. Here are the numbers: in the first three quarters of ’08, China invested RMB 150 bn in railways (which was an increase compared with previous years). In Q4 ’08 alone, China invested RMB 150 bn in railways, the same amount as the previous three quarters combined. In 2009, more than double the amount of ’08, i.e., RMB 600 bn, will be invested in railways. At least the same amount have been budgeted for 2010. In 4-5 years, China will connect almost all of its major cities with bullet trains on a national high-speed railway network longer than the rest of the world’s high-speed railways combined. Several dozens of cities got approvals to go ahead with their metro systems construction, previously on-hold due to government investment restrictions.

    All these infrastructure buildout will greatly facilitate the urbanization process, the next great story of China’s economic development.

    On the social infrastructure front, the three-year, RMB 850 bn investment in a national health insurance program was announced, in no small part accelerated by the financial crisis. Several thousands of city and county hospitals will be built according to Premier Wen Jiaobao’s Work Report at NPC. Health care is an area that is severely under invested in China.

    Energy should be another focus, in new energy, alternate energy and upgrade of the existing energy infrastructure to reduce pollution and improve efficiency. This is an area where there are great potentials for US-China cooperation, given Obama administration’s priorities.

  • Posted by 4degreesnorth

    Brad,

    I suggested a few months ago that the rebalancing that you had been calling for over the past 4-5 years might be on the way and that it would not be pretty. You thought that the Chinese surplus would remain high. It seems that the rebalancing could indeed be on the way. We will of course need more data to be sure, but should at least agree that the jury is very much out on this one.

  • Posted by Indian Investor

    @greg: Thanks for a wonderful description and information on China’s infrastrucuture build out, especially the details on their bullet trains. My understanding is that “health insurance” in China has nothing to do with an insurance policy in China. It actually means Government-built hospitals and medical facilities where people get treated at subsidized cost – is this correct? Also, there isn’t any unemployment benefit there, perhaps the same as India.
    China can make these kinds of investments because they have a tremendous forex reserve, they face the least chances of going externally insolvent, and they’re fiscally strong as well. If there’s too much increase in import demand, China can partially pay for the imports with their own currency.
    India is already on the Standard & Poor scanner, after the Government announced some Excise Duty cuts as a third round of stimulus.While the Govt. of India is doing the maximum it can do for a stimulus without being declared insolvent, the available leeway is really small.

  • Posted by Glen M

    Here is some more information on China’s bullet trains….

    “In a Financial Times interview, Philippe Mellier, chief executive of the Paris-based company, also claimed Chinese companies were offering for export trains that used technology derived from western suppliers.

    Such technology is usually supplied on condition that it is not used outside China.”

    “However, after a period when China signed contracts with several suppliers from other parts of the world to transfer technology to itself, it is gradually insisting that new trains be entirely domestically designed and built.

    Chinese manufacturers are also increasingly seeking orders in the European heartland of Alstom, Bombardier Transportation, the world number one, and Siemens, the number three.”

    Mr Mellier, whose company builds France’s TGV high-speed train and has exported high-speed trains to several countries, pointed out that tenders for high-speed trains for new Beijing to Shanghai services specified they be entirely Chinese-built and designed.

    “In line with our expectations, the market is gradually shutting down to let the Chinese companies prosper,” he said.

    “If the market is now closing down, we don’t think it’s a good idea for other countries to open their markets to such a technology because there’s no reciprocity any more.”

    Perhaps after commenting on the perils of “Buy America” the PRC could explain why “Buy China” is good.

  • Posted by Indian Investor

    Robert Bosch is the biggest designer, manufacturer and supplier of locomotive engines to the Indian Railways. Mr. Mellier’s unnamed company must have lost contracts in China to better players.

  • Posted by Johnny

    I don’t look at china vs. u.s. , u.s. vs. china, i look at the world as one.

    and my big dream is China and U.S.A. cooperate on an agreement for alternative energy.

    this would mean billions, if not trillions invested in solar, wind, and nuclear power.

    i’ve lived a good life, but i want my grandchildren and his children to live one that’s equally good if not better.

  • Posted by greg

    Glen M:Here is some more information on China’s bullet trains….

    I read the FT report when it was published; I also read a lot of counterarguments from China. Here is how I interpret the whole thing based on my readings.

    China has a high-speed train program for quite some time and they even built some operational high-speed rail lines using indigenous technologies. Around ’04 or so, apparently not pleased with the progress by the domestic manufacturers, Chinese government followed a “market-for-technology” strategy, forming several joint ventures between separate Chinese manufacturers and foreign companies, including Alstom, Bombardier, Simens and Kawasaki to supply rail cars and other related bullet train-related technologies to build Chinese railways.

    The foreign companies transferred their technologies – not the cutting-edge type, and got the orders (and will continue to benefit from the orders from their JVs with Chinese). The Chinese partners obviously absorbed the technologies and improved on them. For example, the Beijing-Tianjin high-speed railway has an operating speed of 350 km/hr, which is much higher than the transferred technology can support, but the technologies are obviously derived from the foreign ones.

    The Chinese argued that the foreign partners got their market and they absorbed the technologies and further developed their own. I don’t know what the contract details are, but I get the impression that some foreign companies either underestimated China’s technical capabilities or were not happy with number of orders they got in China. Also, it’s interesting that other foreign companies did not come out and make the same complaints.

    By the way, Alstom and China Railway Construction Corp. have recently bid successfully an Saudi bullet train project in Saudi Arabia.

  • Posted by Indian Investor

    @greg: According to me global trade shouldn’t be looked through a global hegemony time warp lens. That lens says “If Americans don’t consume, global trade will crash and burn to the ground”.
    The only reason exports were directed to the US was the good old petrodollar system, which we don’t need to repeat all the time.
    Now there’s going to be a system with much more globalization, on a more multipolar basis; there will be several reserve currencies and settlement currencies; also, exchange of goods and services will happen on a more equitable basis. The collapse of the American Empire augurs very well for global trade. Apart from what you mentioned (bullet train exports from China to Saudi Arabia), China might be thinking about exports to, say, even Belarus. Or else, why would they sign a currency swap agreement with them? The other currency swaps from China are for its trade partners on the import side, this one must be for new exports.

  • Posted by greg

    Indian Investor: My understanding is that “health insurance” in China has nothing to do with an insurance policy in China. It actually means Government-built hospitals and medical facilities where people get treated at subsidized cost – is this correct? Also, there isn’t any unemployment benefit there, perhaps the same as India.

    The three-year, RMB 850 bn investment is strictly for a national health insurance coverage program. The amount is actually not all that large given China’s population. The goal is to cover 90% of the population in three years. It’s a down payment, but I think it’s important for the government to make the commitment and improve the coverage gradually. At this point, China obviously can not afford a Western Europe-style welfare system.

    The hospital and medical facilities development plan is separate. According to Wen Jiabao’s Work Report at NPC, China will build 5,000 township clinics, 2,000 county hospitals and 2,400 community health care centers in the cities in three years.

    I’m not aware of any unemployment benefit programs in China. Certain local governments have some aid programs to low-income family, but migrant workers are definitely not

  • Posted by Pallj

    Excuse this off topic post.

    The Norwegian Oil Fund has posted USD 90 billion losses for 2008 and from January 2008 to now the losses are estimated at USD 115 billion. That is just 10 billion short of the Norwegian state budget in volume. This is said to bring the fund down in size to 1998 levels.

    I can’t find an English link to the story yet, but here’s a Norwegian link http://www.nettavisen.no/okonomi/article2570264.ece

    Our favorite, transparent SWF has posted losses of more than 23%, and you can’t help but wonder how things are going for the murkier SWFs and how this will impact the world economy in both the short and long term?

    Will a more conservative investment policy across the board translate to an even tighter credit crunch, or is this just another sign of the times we live in?

  • Posted by Twofish

    Indian: Now there’s going to be a system with much more globalization, on a more multipolar basis; there will be several reserve currencies and settlement currencies;

    I don’t think so. The only currency that could possibly compete with the US dollar as a reserve currency is the Euro. China has neither the ability or the desire to make the RMB a reserve currency.

    One thing that the “China threat” theorists got very wrong was this notion that China wanted to take over the world. China *doesn’t* have any global ambitions. It wants to be a great power, yes, but it has no global or even regional power ambitions.

    Chinese nationalism in some ways is very insular, it really just wants control over the territories within its borders. There are disagreements over what those borders are, but China really has no ambitions to influence the internal politics of Brazil or even Vietnam or Japan.

    Indian: The collapse of the American Empire
    augurs very well for global trade.

    Personally I don’t think that American power has collapsed or will collapse. The US will likely emerge from the crisis stronger than ever.

  • Posted by greg

    @Johnny:
    I agree whole-heartily.
    I understand the Obama administration is fighting a banking crisis now, but I agree with his long-term priorities on education, health care and energy. The oil price may be down now, but the longer term prospect does not look good. The US infrastructure, based on expressways and airports, is at a disadvantage compared with Japan and Europe’s more energy-efficient public transit systems. The US needs to prepare for a world with much higher oil price.
    China obviously copied US’s interstate highway system; the Chinese auto market will be greater than the US’s in a few years. This really concerns me. With US and China suck in so much of the planet’s dwindling oils, it will not be a pretty world to live in. This is part of the reason I’m very interested in China’s bullet train and metro systems.
    China has an ambitious nuclear energy program; it also has an aggressive wind energy program. If US can develop or co-develop with China some alternative energy technologies, there is a large market there.

  • Posted by Twofish

    Indian Investor: My understanding is that “health insurance” in China has nothing to do with an insurance policy in China. It actually means Government-built hospitals and medical facilities where people get treated at subsidized cost – is this correct?

    There are facilities already there, the main problem right now is that Chinese health financing is just a total mess.

    China has been experimenting with various forms of health insurance over the last few years, and the crisis just sped up the roll out. The problem is that the health care system basically collapsed in the 1990′s.

  • Posted by Indian Investor

    For quite a long time I’ve been trying to make a simple point about China and trade, etc. The only way the US can come out of its crisis successfully is as follows: Within 3-4 years they need to make rapid progress in reducing import dependence. That has to start with changing the mad situation where the US needs to consume 80% of the world’s oil supplies just to maintain a 300+ million population.I find nuclear power plants to be a better and Obama’s windmills ideas to be on the Quixotic side.That’s not a support for John McCain, or the Reps at large.
    Doing this well gives a lot of freedom from external financing needs. Meanwhile, if the US doesn’t do anything warlike, the natural tendency of the Rest of the World is to plan for multiple reserve currencies. That should reduce the USD exchange rate quite a lot.
    Then they can plan to reduce dependence on Chinese electronics, etc.
    Think about this from an employment perspective; Setting up power plants, building plug in filling stations and manufacturing a new generation of electric cars to replace the old ones will all generate quite a lot of jobs, that can replace some of the current losses. Obviously I expect they’ll continue with their plans to refurbish the government and school buildings, etc.
    And the US can try to increase its construction equipment, aircraft, etc exports alongside.
    And, they need to steadily reduce the military expenditures and try to identify some areas where the military research output can be commercialized better.
    All this will be more than enough work on the plate for 3-4 years.
    Meanwhile allow EUR,RMB,Roubles, etc to become reserve currencies along with the dollars, and let the dollar weaken steadily.
    Then the next challenge – i.e. further reduce import dependence and further increase exports – can be met more easily.
    Till these things happen, any thoughts of doing without foreign financing, or having some kind of war with China, etc is unrealistic.
    Also, the US needs to urgently strike a deal with Russia and NATO over Afghanistan.And disband the new IMF Edwin M Truman dreams completely.

  • Posted by DOR

    Indian Investor,

    China will “internationalize” (whatever that means) the Rmb when it suits them to do so, and my bet – if you mean convertibility – is two years after this Mother of All Recessions is over. As for a floating exchange rate (if that is what “internationalize” means), decades away, as Twofish says.

    As far as a Samudragupta Empire, remember that Gupta didn’t try to run the states he conquered, but reinstated their kings as his subjects. Might be something in that, with suitable modern adjustments.

    = = = = =

    Sinomania!,

    What makes you think there is any demand to settle trade in Rmb? Sure, the Hong Kong government announces a great victory in getting some cross-boundary trade with Guangdong denominated in Rmb, but it wasn’t because of any great demand from traders or manufacturers. On the south side of the Yunnan border you won’t find a more attractive (and readily available) currency than the Rmb; on the north side, and you won’t find a lot of Baht, Kip or Kyat.

    As for non-US markets, the great attraction of the US is that just about everyone can be convinced to want the same thing. 100,000 dozen identical pieces, packaged the same and shipped to the same port are a whole lot cheap to produce (per item) than 5,000 dozen in one style, 5,000 dozen with another language, etc., etc.

    = = = = =

    Greg,

    There are some experimental unemployment insurance programs being tried out in the North-east. Basically, SOE staff are laid off but receive the same pay (minus overtime, etc) as a ‘benefit.’ The advantage is that the company or factory can then be reorganized, renovated or sold off.

    = = = = =

    This economy is brutally ugly, but media reports from journalists who only half understand the issues won’t help.

    Jan-Feb exports were down 21.1%, imports 33.8%. In the previous 8 years, exports in the first two months of the year rose an average of 29.5% and imports 32.2%. In 1999, exports fell (10%) but imports continued to rise (+5.2%). In the two previous years, it was the reverse: exports up but imports down.

    In the first two months – as Macroman says, never, ever look at January or February in isolation – the trade surplus was $43.47 bn, the lowest in half a year (May-June: $40.58 bn), not the lowest in three years.

    Regarding trade prices, here’s some data that others might find interesting. The percent figures are changes to the deflators (my calculations based on volume and value data), not to the value alone.

    Selected 2008 China trade deflators
    Exports–
    Auto-data processing equipment and components (value: US$135 bn): +10.4%
    Rolled steel ($63.4 bn): +51.7%
    Telephones ($41.5 bn): +3.5%
    ICs ($24.3 bn): -13.3%
    LCD panels ($22.4 bn): +5.7%

    Imports–
    Crude oil ($129.3 bn): +47.8%
    ICs ($129.3 bn): -7.8%
    Iron ore ($60.5 bn): +54.5%
    ICD panels ($44.1 bn): +9.1%
    Primary plastics ($34.1 bn): +12.4%
    Oil products ($30 bn): +58.9%
    Auto-data processing equipment and components ($25.4 bn): +0.7%
    Rolled Steel ($23.4 bn): +23.8%
    Grain ($23.1 bn): +63.3%
    Copper ($19.2 bn): +2.7%

  • Posted by Cedric Regula

    greg

    Westinghouse licensed China to build it’s 3G nuclear paints. China built a huge R&D facility to assimilate the technology. Maybe they will sell them to us some day if they still take dollars for payment.

    The energy situation is not too good on the supply side in the US. As far as electric goes (and this would be a transport fuel for plug-in hybrid cars, all electric cars, or bullet trains) we are getting into deep dodo. Current power mix is 50% coal, 25% aging nuclear (due to be retired over the next 10 years), 20% natural gas, and 5% “other”(mostly hydro).

    Some estimates I’ve seen say it may be possible to get as much as 10% of our capacity from wind and solar. (It’s mostly wind).

    We have a big gap shaping up and the Sierra Club has already shut down half of the new coal power plant projects that are in the design phase. Now they want to go after the operating ones.

    We know what they think of nuclear power, and they have been blocking Yucca Mountain, NV which the DOE selected as the national waste disposal site.

    So if we are not careful, the lights go out in the US in about 10 years.

    Then after everyone decides they don’t like that and want traffic lights and everything else electric to work again, we will find out these construction projects take 6-8 years from design to going on line.

  • Posted by ReformerRay

    The important information, for me, in the above chart, is the agreement between imports and exports between theyears of 1990 and 2003.

    These were the years that China was establishing its world leadership in exporting low cost goods.

    During that period, they had a large trade surplus with the U.S. – but not with the rest of the world.

    Two lessons: 1) A trade surplus is not necessary to use exporting to boost economic growth. Just make sure the imports consist of materials that can be transformed into exports. 2) Have a sucker country (wealthy and a believer in free trade) like the U.S. to buy your product.

  • Posted by Namke von Federlein

    “The fall in commodity prices and a (likely) domestic slowdown suggest a rise in China’s surplus.

    The dollar’s rise — and the resulting real appreciation of the RMB — and the slowdown in global growth by contrast suggest a fall in China’s surplus.

    The balance between these competing forces isn’t yet clear, at least to me.”

    Question : Could it be that China’s recent attempts to secure commodity supplies is partly and attempt to provide bette collateralization for the yuan?

    In this light, if commodity prices inflate (in USD) then a fall in China’s surplus seems more likely?

  • Posted by Indian Investor

    @Reformer: When will the so-called well educated Americans learn the simple tricks of the Treasury and the IMF?
    Geithner was personally involved in getting China to build a tremendous forex reserve, through his handling of the 1998 Asia crisis as a 33 year old super-previleged Ivy League US Treasury IMF dude.
    The good old days of ‘mercantilism’ where you can get some other country’s hard currency, and convert it to gold, etc are long gone. You’re repeating an Adam Smith ‘mercantilist’ theology like Setser does here.
    China was compelled to exchange its exports for worthless green pieces of paper. So was every other country, including the oil-exporting countries.Even today, you notice Twofish reaction on mentioning RMB as a reserve currency. As a Chinese person he is scared the US will make an Iraq out of China if they rebel against the phony green dollars, so he wants to play it down, even if they’re really thinking about it.

  • Posted by Twofish

    DOR: As for non-US markets, the great attraction of the US is that just about everyone can be convinced to want the same thing. 100,000 dozen identical pieces, packaged the same and shipped to the same port are a whole lot cheap to produce (per item) than 5,000 dozen in one style, 5,000 dozen with another language, etc., etc.

    This is one reason why the “China market” is so tough to crack. There is no China market, but rather hundreds of different markets in China.

    Investor: China was compelled to exchange its exports for worthless green pieces of paper.

    China was compelled to do no such thing. If in 2002, Beijing believed that a large export sector was not in China’s national interests, they would have shut down the export sector. They didn’t. Personally, I think it was a good decision. Brad Sester and Nicholas Lardy disagree and think that it was a bad decision.

    Something that changed around 2000 was that in the 1990′s the prevailing idea within China was that the United States was a declining power. By the early 2000′s, this assessment changed (and the US attack on Yugoslavia greatly changed perceptions).

    China has no interest in challenging or undermining US political and economic dominance because it is clearly not in its national interest to do so. The only interest China has is in preventing US interference in what it believes to be its sovereign territories.

    Investor: Even today, you notice Twofish reaction on mentioning RMB as a reserve currency. As a Chinese person he is scared the US will make an Iraq out of China if they rebel against the phony green dollars, so he wants to play it down, even if they’re really thinking about it.

    I simply do not see how challenging the US is in the national interests of China, and frankly neither do most people in China. Setting aside the United States, I also do not see the economic rationale behind making the RMB a reserve currency.

    Once you make something a reserve currency, you lose a lot of control over your currency, and I don’t think that it’s in China’s interest to do so, and I can’t imagine what the point is.

    I’m not seriously concerned about a US attack on mainland China. The US doesn’t have the military power or the political will to pull this off. However, there are *lots* of things that the US can do to harm Chinese national interests, and thing there is the “why bother.”

    Something that is really hard for people to grasp is how most Chinese people, really, really, really do not want to take over the world.

  • Posted by Twofish

    ReformerRay: Have a sucker country (wealthy and a believer in free trade) like the U.S. to buy your product.

    It’s not a sucker issue. China ran a huge trade surplus with the United States because just about everyone else runs a huge trade surplus with the United States.

    It’s a consequence of being the world currency. Once the US dollar is the world currency, there will be people outside the US that just want dollars, and that leads to persistent trade deficits. The emergence of the US dollar as the single world currency, was really not foreseen by the architects of Bretton Woods.

    In the case of the United States, it really gets a lot out of having the world currency. Global domination is not such a bad thing for a country that thinks that it has a mission to spread civilization.

  • Posted by ReformerRay

    Twofish responds:
    “ReformerRay: Have a sucker country (wealthy and a believer in free trade) like the U.S. to buy your product.
    It’s not a sucker issue. China ran a huge trade surplus with the United States because just about everyone else runs a huge trade surplus with the United States”.

    Twofish – Go to the U.S Censur Bureau website. Find exports and imports from the U.S. by country for the first 11 months of 2008. I will look up the data and report it on the next post.

  • Posted by ReformerRay

    `For the 12 months of 2008, China’s goods trade surplus with the U.S. was 266.3 billion. Divide that number by their imports to the U.S. and you will see that 79% of the imports into the U.S. from China were not matched by exports.

    For all countries, their trade suplus with the U.S. was 800 billion. Divide that number by imports to the U.S. and up will see the 38% of goods imported into the U.S. from all countries is not matched by exports.

  • Posted by ReformerRay

    Twofish: The fact that people all over the world want dollars does not create a trade deficit in the U.S.

    Countries can acquire dollars by swaping their own currency for dollars. More dollars are acquired by swaps than by a trade surplus.

    A trade surplus has a more important benefit than acquiring a desirable currency. A trade surplus requires the development of a goods production process of excellent quality in the surplus country. It is the quality of the goods producing process in any country that ultimately determines their wealth, as Adam Smith maintained so many years ago. On that issue, he was correct.

    China is in the catbird seat because of its domestic economy – goods producing ability within the country – and a government smart enough and powerful enough to insist that the benefits of that productive ability stays largely in China.

  • Posted by ReformerRay

    Larry Summers says: “The global imbalances agenda was more demand in China, less demand in America. Nobody thinks that is the right agenda now,” said Mr Summers, who previously served as President Clinton’s Treasury Secretary. “There’s no place that should be reducing its contribution to global demand right now. It is really the universal demand agenda.”

    Mr. Summers cannot speak for me. I think the only thing the U.S. can do to contribute to an improved world trade is to insist that a large trade deficit is not in the interests of any country. And that it will no longer be tolerated in the U.S.

  • Posted by Twofish

    ReformerRay: For all countries, their trade suplus with the U.S. was 800 billion. Divide that number by imports to the U.S. and up will see the 38% of goods imported into the U.S. from all countries is not matched by exports.

    Which was my point. Just about everyone runs a trade surplus with the United States.

    ReformerRay: Countries can acquire dollars by swaping their own currency for dollars. More dollars are acquired by swaps than by a trade surplus.

    But eventually it all has to balance out. Since dollars are produced in the United States and the only way to get them out of the United States is to exchange them from goods and services, to get dollars out of the US, you have to run a trade deficit.

    ReformerRay: A trade surplus requires the development of a goods production process of excellent quality in the surplus country.

    No it doesn’t. You can get a trade surplus by simply passing laws that encourage domestic industry regardless of how badly run that industry is. The reason that free trade came into fashion was because in the 1950′s a lot of Latin American and African countries tried to develop industries by creating high tariffs, and what they ended up with was huge inefficient, bloated industries that destroyed more value than they created.

    Of course, the reason they tried import substitution was because they tried free trade in the late-19th and early 20th centuries, and that didn’t work that well either.

  • Posted by Max Anderson

    I am up to speed on what is going on here. I have conferred with E on the concept of transitioning blue collar work overseas versus exporting our jobs overseas. The concept also of mineral rich Congo is another issue at hand. With this comes the responsibility of waste as well. We will have to harness that as we transition our own consumption and redelvelopment and engineering in each project. Overpopulation, I feel, is a necessary focal point of why we are in reverse now. By studying the finacial fall of the USSR and the great depression of the US we need to see how the farming industry was affected in each crisis, why jobs were not created, and the exact numbers of people during each crisis. Modelling is an important tool to understand and learn from histories mistakes & try to not repeat it over and over again in social trends.
    Best,
    Max Anderson

  • Posted by ReformerRay

    Twofish is beginning to frustate me. He may have more staying power than me.

    79% is enough larger than 38% to be able to say that China’s surplus with the U.S. is off the chart, compared with other countries.

    From 1946 to 1976, the U.S. ran mostly a trade surplus with the rest of the world. Somehow, without a trade deficit, the rest of the world was able to acquire enough dollars to do their thing. Sometimes things balance out, sometimes they do not. The U.S. goods trade deficit since 1976 with the rest of the world has not balanced out. Currency exchange is influenced by the value of the various currencies, but there is no necessity for the amount of currency in circulation to be any certain number or relationship. The trade deficit in the U.S. happened because Japan showed the world the advantage of exporting goods to the U.S. That was the way they built their economy up to become the second largest in the world – a few decades ago.

    You tell me about a couple of attempts to build up an undeveloped economy that failed. The reason these efforts failed is that the domestic economy did not build up a niche in which they were better at building things for exports than other countries.

    Why are you so stubborn? Do you really think that something else other than the productive capacity of the domestic economy controls the wealth of a nation?

  • Posted by cmc313

    Dr. Sester:

    A question on the dollar. Per telegraph.uk article below, European banks have a $2 trillion funding gap in the dollar…this is not new demand as they have been rolling over short-term funding all along, but with liquidity drying up, they become desparate to look for dollar, thus driving up the dollar. Do you think this trend will last…i.e., does it alter your long-term bearish structural view on greenback? My position is that the dollar will weaken against commodity-rich and Asian currencies once global economy stabilizes, but given this $2 trillion funding gap, I wonder if dollar can stay strong for a while. Thanks for your reply in advance.

    European banks face a US dollar ‘funding gap’ of almost $2 trillion
    Photo: AP

    The BIS said European and British banks have relied on an “unstable”
    source of funding, borrowing in their local currencies to finance “long positions in US dollars”. Much of this has to be rolled over in short-term debt markets. “The build-up of large net US dollar positions exposed these banks to funding risk, or the risk that their funding positions could not be rolled over,” said the BIS.

    The report, entitled “US dollar shortage in global banking”, helps explain why there has been such a frantic scramble for dollars each time the credit crisis takes a turn for the worse. Many investors have been wrong-footed by the powerful rally in the dollar against almost all
    currencies, except the yen. British banks had accumulated a dollar
    “funding gap” of $300bn by mid 2007. The latest BIS data up to the third quarter of 2008 shows that this exposure has been trimmed by “deleveraging” but it still largely hanging over the UK financial institutions.

    Swiss banks had a funding gap of $300bn at the onset of the credit crunch, an extremely high figure relative to Swiss GDP. German banks were $300bn short, and Dutch banks were $150bn short. Belgian and French banks were neutral. The BIS said the total “funding gap” in dollars was around $2.2 trillion at the peak, when money market liabilities are included. This had fallen to around $2 trillion by the time of the Lehman Brothers collapse. The data is collected with a lag but it appears that there are still huge dollar liabilities to be covered.

    Simon Derrick, currency chief at the Bank of New York Mellon, said the implications are obvious. “The global bullion of the last eight years was funded on dollar balance sheets, so the capital destruction we’re seeing leaves banks starved for dollars. Dollar is clearly going to
    appreciate a lot further,” he said. * This article has been updated
    following reader queries over the complexity of the banks’ “short” and “long” positions in dollars.

  • Posted by Indian Investor

    @Twofish: China requesting its ASEAN pals to hold some RMB Bonds instead of only dollars dosn’t constitute “challenging the US”. If they’re going to develop a local market, they need more imports. There are only two ways to finance the imports. One, get dollars from US and other exports and hand them over to other countries.The other way is to make the RMB a reserve currency. If China is going to add to the global demand, the best way to do that is by making the RMB a regional reserve.

    Reformer: Adam Smith was writing about countries exporting goods and accumulating “hard currencies”, meaning gold. A country could get rich through exports in those days because they could get gold in exchange for exported goods.
    In the post-1971 world,the dollar isn’t a hard currency anymore. It’s a fiat currency, and no country can get rich by accumulating dollars.
    As Dick Cheney said, the dollar gets 90% of its value from the US military. As long as the US could force acceptance of its dollars through petrodollar recycling, etc it was a good idea for countries to accumulate USD. Now, it isn’t.
    cmc: The dollar funding ‘need’ will be ever wider due to the US ZIRP. Whether the need will be met or not depends a lot on getting a functioning banking system in the US. And the debate on how to do that is raging, still.

  • Posted by Johnny

    @ greg,

    keeping my fingers crosses that companies such as First Solar, Vestas and China’s Suntech Power re-invent the world with which we live.

    I would be delighted if I leave this earth knowing that the majority of energy consumption used by my children’s children comes from the revolution of what i coin greenology.

    I’m confident we’ll get there, obviously oil at $75 would make the transition more demanding.

    I’ll keep my fingers crossed. I think China-EU-China global alt. energy consumption model would be amazing.

  • Posted by ReformerRay

    Indian Investor: Reformer: Adam Smith was writing about countries exporting goods and accumulating “hard currencies”, meaning gold. A country could get rich through exports in those days because they could get gold in exchange for exported goods”.

    Adam Smith denied that a country could get rich by accumulating gold. Spain was his dramatic example. More gold accumulated by Spain eventually drove down the price of gold and lack of ability to produce (created by being able to buy from other with gold) led to the demise of the power of Spain.

  • Posted by Twofish

    ReformerRay: From 1946 to 1976, the U.S. ran mostly a trade surplus with the rest of the world. Somehow, without a trade deficit, the rest of the world was able to acquire enough dollars to do their thing.

    It wasn’t until 1960′s was when people starting holding reserves of dollars overseas, but you really didn’t get huge reserves until after 1971 when the US went off the gold standard because the strains for dollar demand were just too much for Bretton Woods I.

    ReformerRay: Currency exchange is influenced by the value of the various currencies, but there is no necessity for the amount of currency in circulation to be any certain number or relationship.

    Yes there is. US currency gets created in the US, and if you want dollars, you have to export them.

    ReformerRay: The trade deficit in the U.S. happened because Japan showed the world the advantage of exporting goods to the U.S. That was the way they built their economy up to become the second largest in the world – a few decades ago.

    That’s not true at all. Japan industrialized in the late-19th and early 20th centuries with an import substitution policy. It was already a major industrial power before World War II, and Japan being a major industrial power is what caused WWII.

    After WWII, Japan’s recovery was mainly a function of clearing out the rubble and rebuilding. The US kept its markets open to Japan and Europe largely to stop the expansion of Communism and prevent a return to Fascism. By making Europe and Japan dependent on US markets for economic growth, the US was able to hold a huge amount of power an influence over the two.

    ReformerRay: You tell me about a couple of attempts to build up an undeveloped economy that failed. The reason these efforts failed is that the domestic economy did not build up a niche in which they were better at building things for exports than other countries.

    And they didn’t need to. Once you put in trade barriers who cares about being efficient. Also, in the case of Latin America, you end up with tiny markets.

    ReformerRay: Why are you so stubborn?

    Because I think you are wrong, and because I think that your economic framework would be generally disastrous. To see why, look at Japan, which has been an economic mess for over a generation.

    ReformerRay: Do you really think that something else other than the productive capacity of the domestic economy controls the wealth of a nation?

    Absolutely. Otherwise Japan would be richer than the US, which it isn’t.

  • Posted by ReformerRay

    The merchantilest position was that exports must be in a surplus so that a country can acquire gold.

    He said that the objective of acquiring gold was the wrong objective, therefore, acquiring a surplus was the wrong objective.

    He showed that an economy could grow through trade without achieving a surplus.

    In these arguments, he was right.

    Where he was wrong was his insistence that a trade deficit did not harm a country. The conclusion that is logically deduced from his acceptable arguments is the equal trade should be the goal of every nation.

    He refused to accept equal trade as a goal because the merchants of England were justifying import restrictions on goods they produced by argueing that import restrictions were necessary to bring England to equal trade. Same argument used in France. He denied the importance of equal trade in order to forestall the importunes of selfish protectors of their own domestic output.

    The above will sound like an irrelevance to many. It is suprising how many current views can be traced back to a misreading of Adam Smith.

  • Posted by Twofish

    Investor: In the post-1971 world,the dollar isn’t a hard currency anymore. It’s a fiat currency, and no country can get rich by accumulating dollars.

    China has done pretty well for itself doing just that.

    Investor: As long as the US could force acceptance of its dollars through petrodollar recycling, etc it was a good idea for countries to accumulate USD. Now, it isn’t.

    The value of the dollar is tied to the fact that the US is the world’s most powerful country both politically and economically, and that is just unlikely to change any time in the next generation, because it’s in no one’s interest to change it, least of all China.

    As long as an understanding is reached regarding Taiwan (and one has been), then China is going to do everything it can to support US global dominance. The Arabs are dependent on the West for their wealth. Europe doesn’t have the interest to be a global power, and Russia is not terribly interested in challenging the US as long as its “sphere of influence” is respected.

    The fact that China has $2 trillion in US treasuries that would be worthless if the US collapses, just gives China more of an incentive to prop up US power. There was a wave of anti-Americanism in the 1990′s, but that has long, long past.

  • Posted by ReformerRay

    ReformerRay: Why are you so stubborn?
    Because I think you are wrong, and because I think that your economic framework would be generally disastrous. To see why, look at Japan, which has been an economic mess for over a generation”.

    Becoming an economic powerhouse is one thing. Learning how to arrange the domestic economy so the wealth is shared is a lesson neither the U.S. nor Japan has learned. My point is that the U.S. became strong in the end of the 19th century because of the productivity of its domestic economy. Japan became strong after WW II because of the productivity of its domestic economy. China became strong in the last 15 years for the same reason.

    The Japanese “lost decade” was the fault of its banking system and its banking system was intimately tied into the industrial system and both banking and industrial system were designed to produce an excess of exports over imports. I have never approved of that objective. I support equal trade for all nations. Japan got in trouble because it sought a trade surplus. Japan did not get in trouble because of the economic power of its domestic economy.

    ReformerRay: Do you really think that something else other than the productive capacity of the domestic economy controls the wealth of a nation?
    Absolutely. Otherwise Japan would be richer than the US, which it isn’t”.

    Japan is richer than the U.S. on a percapita basis according to some. Almost all agree that Japan is at least equal to the U.S. on a percapita basis. In the future, rich nations will be those that can produce goods that sell on the international market. Nations that are willing to participate in international trade on the basis of equal trade will be those who are moving towards a sustainable system of trade. And hopefully, toward a sustainable system for distributing the rewards among their people.
    March 12th, 2009 at 4:24 pm

  • Posted by ReformerRay

    Japan, Germany and China along with other Asian nations are well positioned to pick up economic growth after the banking fiasco is over. They have domestic economies that can produce valuable goods.

    The U.S. is poorly positioned to recover because it shifted from a manufacturing economy to a finance oriented economy as the source of profits and its finance economy has blown up.

  • Posted by RebelEconomist

    Twofish: “It wasn’t until 1960’s was when people starting holding reserves of dollars overseas, but you really didn’t get huge reserves until after 1971 when the US went off the gold standard because the strains for dollar demand were just too much for Bretton Woods I.”

    Rubbish! Bretton Woods broke down because key countries such as France, Germany and Italy did NOT want more dollars. They were redeeming their dollars for gold in anticipation of dollar devaluation following years of printing money to finance the Vietnam War. In the years leading up to the demise of Bretton Woods in 1971, the US lost half of its gold reserves.

    Check your facts.

  • Posted by locococo

    We can follow this prepaid trip of appreciation on the sudden rise in demand and we will rise as they fall. The peak buck$ are the last job lost, share sold, bond auctioned, factory closed and the last tent foreclosed. In short the last credit event to short. Then you own nothing but the shorting, the naked shorting, some time and the printing press. Otherwise you’re jobless, incomelss, deleveraged and deeply depressed although well stimulated as well. Then the trend turns. Then the change comes.

    As for the »when will we default?«, it was 71, not the future. On the back of the Friedmanite insight that gold is not money (nevermind zi german banksters, the war, a secretary and the financing patterns of the -from there onwards (90% of) – US dollar s strength. And it did show off on occasion, here and there.

    When someone invented the hedge fund restyling for the central banks to adopt on deficient markets under the debt liability pricing model as asset and capital as their guide to yield hunting and re-educated enough for them to sell off their yieldless assets, then one function of money, not money itself, a storage of value awakened on the most deficient, swapped to the future and otherwise misused and bugged market of all. Then someone started calculating how deep was that storage. The evil backstabbing longers.

    Anyway. Short the longs then sell your gold. It s worthless. Become equally traded. Be productive.

    Then you ll get back your gold. Or a bond, if you wish to. Or you won t, if defaulted upon.

    That is how Ben does not speak.

  • Posted by ReformerRay

    Twofish keeps saying the the U.S. is the world’s most powerful nation because no one is interested in changing it.

    Instead of looking into the mind of the leaders of any other nation, let’s examine what they do.

    China, Japan and Germany have had the good sense to position their economies so they will grow in the future. Now that the U.S. finance system has collapsed, the U.S. has no source of economic growth.

    The great wealth the U.S. accumulated in the decades after WW II remains in considerable part, thus the U.S. has the reminants of power. But other countries are growing in productive power faster than the U.S.

    The U.S. is unwilling to fact this reality. If we were willing to face reality, we would move aggressively to create a fiscal surplus in our government budget and reduce our trade deficit. That way the U.S. could prepare to cushion our relative decline.

  • Posted by DOR

    Twofish: I agree there is no “China market.” Further, and of great interest to non-Chinese companies, there is (generally) no dominant Western brand in many of the larger China markets. That makes it very attractive to give it a go.

    As for China challenging the US, I think your statement would be greatly strengthened by the inclusion of “yet.” Oh, and many of the US’ warships and military aircraft have the ability to attack the Chinese mainland undetected. I agree it isn’t likely (or smart), but that’s a separate issue.

    Something that is really hard for people to grasp is how most American people, really, really, really do not want to take over the world.

    = = = = =
    Indian Investor: One of the easiest ways to get people to really, really dislike you is to unnecessarily comment on an individual’s nationality. I cannot stress enough what a bad idea that is, even if you happen by some remote chance to be correct.

    = = = = =

    ReformerRay: I agree with Twofish that your economic framework would be generally disastrous.

    Your views on trade seem to suggest you would appreciate reducing the American standard of living by, oh, about three-quarters. Is that really your solution? If so, why would you want to punish hundreds of millions of Americans that way?

    National trade balances: Location isn’t everything. 55% of China’s exports are produced by foreign-invested companies. If we could accurately identify which portion of which exporting companies are “American,” we would find that national trade balances are a decidedly old-fashioned notion.

    Begin with this truth, and see where it takes you: The portion of China’s trade surplus that is actually made by Chinese-owned companies is very small indeed.

    And, yes, something other than the productive capacity of the domestic economy controls the wealth of a nation. What is the productive capacity of Nike, Dell, Disney or Microsoft?

  • Posted by Twofish

    ReformerRay: China, Japan and Germany have had the good sense to position their economies so they will grow in the future.

    China is growing so fast because it is recovering from centuries of economic and political mismanagement. The Chinese political and economic system is a mess. It’s much less bad than it was in the past, but it is still a mess. The good news is that when something is a total mess, it’s not that hard to find ways of improving it.

    Japan has a stagnant economy. The issue here is that Japan is unwilling to make some of the tough decisions that it takes to create a dynamic economy, because I get the sense that most Japanese would rather live in a stagnant economy than make the social changes necessary to create a dynamic one.

    ReformerRay: Now that the U.S. finance system has collapsed, the U.S. has no source of economic growth.

    a) The United States financial system has collapsed. When people start looting stores to keep from starving, then we can talk about a financial collapse.

    b) The US has one of the best constitutional political systems in the world. Some of the politicians are idiots, but the US political system is far, far more idiot-proof than the Chinese one is. It has the world’s best research universities, some of the world’s best companies. It has an extremely open immigration system. An extremely influential and powerful cultural production system. Some of the most efficient factories in the world. That’s not even getting into the 12 carrier battle groups and 2500 nuclear bombs.

    Who do you think has a better chance of being President? A Tibetan kid in Lhasa or a Tibetan kid in New York City?

    So you have idiots running the country and the system blows up. Big deal. Replace the idiots, fix the problems, and move on. The strength of the US, is that you *can* have idiots running the country and survive.

    ReformerRay: The great wealth the U.S. accumulated in the decades after WW II remains in considerable part, thus the U.S. has the reminants of power. But other countries are growing in productive power faster than the U.S.

    That that’s because they are playing catch-up. There are *so* many things wrong with the Chinese economy, that it’s easy to find things to fix. Build a railroad and freeway. Immediate economic growth. You can put a badly run, inefficient factory in China, it *still* will make money because it was better than what was there before.

    In the US it is harder because the railroad has been there for a hundred years and the freeway has been there for fifty.

    Even if everything goes well, China is so far behind that it will take decades to reach the level of the US, and as time passes it will be harder and harder to play catch up.

    The only good news is that most Chinese realize that this is the situation, in contrast to Japanese in the 1980′s.

    ReformerRay: The U.S. is unwilling to fact this reality. If we were willing to face reality, we would move aggressively to create a fiscal surplus in our government budget and reduce our trade deficit. That way the U.S. could prepare to cushion our relative decline.

    That’s a bad, bad idea. To keep any sort of lead, the US has to invest very heavily in people.

  • Posted by ReformerRay

    “ReformerRay: I agree with Twofish that your economic framework would be generally disastrous.
    Your views on trade seem to suggest you would appreciate reducing the American standard of living by, oh, about three-quarters. Is that really your solution? If so, why would you want to punish hundreds of millions of Americans that way?”

    Well, well. Two people agree that my views of trade would be disasterous, if implemented. Their opinion does not settle the issue.

    If the goods trade deficit for the U.S. in the year 2008 had been 410 billion rather than the 820 billion actually experienced, and the U.S. economy had been able to provide the goods that we formerly purchased overseas, the Gross Domestic Product of the U.S. would have increased by 410 billion dollars to 15.2 billion rather than the 14.8 billion actually experienced.

    Now it is not at all certain that the U.S. economy could have increased production in goods to substitute for the 410 formerly bought overseas. On the other hand, as Twofish keeps telling me, the U.S. economy is resilent and resourcefull. Maybe the 410 billion added by U.S. production will be a different set of goods from those formerly purchased from overseas. Maybe they will be goods that contribute to a green economy.
    Maybe the U.S. citizen will just not spend so much money and Personal Consumption Expenditure will decline by 2% or even 4%. Is that 75% reduction in the U.S. standard of living? (410 billion is 2.8% of the Gross Domestic Product).

    My critics have not seen the details of my proposal. I propose to gradually change from where we are today to reduce the trade deficit by half in 3 years. Nothing drastic about it. And it all can be accomplished without destroying the U.S. standard of living. They are just histerical because someone is thinking of restricting access to the U.S. market. UNTHINKABLE.

  • Posted by ReformerRay

    DOR continues: “National trade balances: Location isn’t everything. 55% of China’s exports are produced by foreign-invested companies. If we could accurately identify which portion of which exporting companies are “American,” we would find that national trade balances are a decidedly old-fashioned notion.

    National trade balances are very important because they tell us what share of the product consumed in a country is produced overseas. It matters not to the person unemployed in Toledo that the firm in China is owned in the U.S. What is important to him is that he is out of work. Employement and production in the U.S. must decline as more goods consumed in the U.S. are produced overseas.

    DOR continues: “And, yes, something other than the productive capacity of the domestic economy controls the wealth of a nation. What is the productive capacity of Nike, Dell, Disney or Microsoft?”.

    When those companies locate their production facilities in the U.S. it provide jobs and revenue for U.S. citizens and governments. When those companies locate production facilities overseas it provides jobs and revenue overseas.

    Readers, please review all the above arguments by Twofish and DOR and you will see that they cannot answer the point that domestic production controls the wealth of every nation. Trading credit default swaps looked to provide wealth for several years but ultimately the U.S. financial services proved to be an unreliable source of economic growth. Financial services can contribute to economic growth in a nation if they help the private sector distribute funds to places of maximium domestic productivity and if they invest wisely overseas, so that profits are returned to the U.S. This activity is a sublement to and not a substitue for domestic production of goods consumed domestically and overseas.
    March 13th, 2009 at 10:05 am

  • Posted by ReformerRay

    “supplement” not “sublement”. The pressure to pass math gets to me frequently.

  • Posted by ReformerRay

    The NYTimes provided a typical editorial on trade on March 11, warning Obama to avoid protectionism and provide leadership in expanding trade in the world.

    No doubt expanding trade would help get the economies of various nations going again. And the U.S. should hope to participate in that growth. But the U.S. cannot benefit from the growth of international trade if it maintains a large trade deficit.

    The NYTimes is blind to the trade deficit and its effet on the domestic economy. Not a word about the size of the goods trade deficit (which has been declining from 47% of goods imports to 38% last year).

    The editorial notes that protectionism is growing throughout the world – in other nations. They do not seem to realize that each nation must protect itself. Each nation should have only the kind of trade which benefits it. All the trade deficit nations in the world should devise some scheme (not restrictions of imports of the traditional sort – by product) to move their trade deficit towards equal trade.

  • Posted by ReformerRay

    The goal of equal trade must take precedent over the goal of more trade. More trade is beneficial to trade deficit nations only to the extent that more trade helps reduce the size of the trade deficit.

  • Posted by ReformerRay

    GDP for the U.S. in 2008 is 14.8 TRILLION, not billion as is falsely stated above.

  • Posted by Beans

    Twofish wrote: “b) The US has one of the best constitutional political systems in the world.

    I would not go that far. The U.S. and China are not quite so different as you seem to think: each is ruled by a small group of people. Democracy in the U.S. is only a façade; the same plutocrats continue to rule, regardless of the party nominally in power. In practical terms there is really not much difference between the two systems of politics.

    Twofish wrote: “Some of the politicians are idiots, but the US political system is far, far more idiot-proof than the Chinese one is.”

    I would not go that far. The U.S. political system is more “idiot-proof” than China’s only because the U.S. is wealthier: it has more room for error. In theory, a democracy should be more resilient, but in practice the U.S. doesn’t really have a democracy.

    Twofish wrote: “It has the world best research universities, some of the world best companies. It has an extremely open immigration system. An extremely influential and powerful cultural production system. Some of the most efficient factories in the world. That not even getting into the 12 carrier battle groups and 2500 nuclear bombs.”

    These are all characteristics of wealth, and they can vanish. Ask the Arabs, the French, and the British. All of them have had at one time or other the best universities, the most influential cultures, and the strongest militaries.

    Twofish wrote: “Who do you think has a better chance of being President? A Tibetan kid in Lhasa or a Tibetan kid in New York City?”

    I would say both have about the same chance: minimal. Believe it or not, there are lots of Tibetans in the Chinese Communist Party.

  • Posted by Cedric Regula

    Johnny:
    “keeping my fingers crosses that companies such as First Solar, Vestas and China’s Suntech Power re-invent the world with which we live.”

    I went to engineering school right after the Arab Oil Embargo. Alt energy was a popular subject at the time and I even took a couple courses in it.

    The theoretical conversion efficiency of a silicon solar cell back then was 15%. It still is. There have been cost reductions in manufacture(plastic film substrates), but the actual conversion efficiency they get is 5%-8%.

    Not much else has changed since, either.

    The only large scale, low or zero carbon solution is nuclear power.

  • Posted by OjO

    Treasuries are a very, very bad investment. The Chinese know it, but they are locked into Treasuries because their holdings are so huge that it is difficult to extricate themselves from a terrible situation that has built up over time. If they stop buying, others will stop buying, and the Ponzi scheme will decompress. If they continue buying, however, the consequences will be worse (for them) down the road. The issuances of Treasuries are so huge (and growing), there is only a slim likelihood that they will be paid back other than with depreciated currency (the Fed can just boost up its balance sheet, even more than it has been doing recently). The mistake of the Chinese was to lend to the US in its own currency. If they had been smart, they would have lent to the US money denominated in the currency of a third party (e.g., euros) (RMB bonds would have blown the dollar peg, but in the future the Chinese could consider that (and will in any event be forced to abandon the peg.)) That’s standard for emerging markets, because they are perceived as fiscally irresponsible – but look at the US!!! The US deficits (federal, state, trade) are simply too large, persistent, and (mostly) growing (without even talking about Medicare and that mother of all Ponzi schemes – Social Security). Interesting times.

  • Posted by ReformerRay

    0j0: Like you, I have worried about the size and growth of U.S. debt.

    I am less worried now that we have a President who will recommend to Congress a decrese in defense spending and taxation on those whose income is over $250,000.

    Of course, any taxation scheme cannot do much in one year. It has taken us decdes to get in this mess. BUT, this is the only President in my memory who aims to add to revenue and reduce spending – as soon as the emergency is over.

    Keyenes did not recommend what the U.S. has been doing for the last 3 decades. He said the Central government should return to a surplus as soon as the depression was over.

    In thirty years of a fiscal surplus, the huge debt can be whittled down to size – despite all the demands placed upon the government.

  • Posted by DOR

    ReformerRay,
    Your calculations of US economic growth with a smaller trade deficit don’t take into account how we get there: massive drop in the price of exports, which implies a massive drop in the standard of living. Once again, I ask the question: Is that really your solution? If so, why would you want to punish hundreds of millions of Americans that way?

    .

    “National trade balances are very important because they tell us what share of the product consumed in a country is produced overseas.”
    —Remind me again why we care where our T-shirts are made? Personally, I prefer $3 shirts to $30 shirts, but maybe I’m the exception. As for your Toledo worker (representing a massive 7% of the US population), I didn’t quite catch why (s)he has the right to drive down the standard of living of the other 93%. Is it some a laborers-are-sacred kind of thing?

    .

    Oh, and simple point of information: Nike, Dell, Disney and Microsoft don’t have production facilities, in the US or elsewhere. What they have a massive value-generating machines that produce products the world wants to buy. What they don’t have is a bunch of dirty, dangerous factories. Not a one.

    = = = = =

    Beans,
    Can you name two Tibetan’s in the Chinese Communist Party politburo? How about in the Central Committee.

    Trick question: there aren’t two in either body.

  • Posted by Beans

    DOR wrote: “Can you name two Tibetan in the Chinese Communist Party politburo? How about in the Central Committee.”

    OK, I wanted to avoid belaboring the politics here, but you asked for it. My response is, How many Tibetans are there in President Obama’s cabinet? Answer: as many as in China’s politburo.

    The question Twofish raised was the likelihood of a Tibetan becoming a major politician in China versus the U.S. My answer was and still is “about the same either way”. In other words, the chances in either case are minimal but not zero.

    There are indeed lots of Tibetans in the Communist Party. You probably didn’t know this because people in the U.S. have been so heavily brainwashed that they have no idea of the true situation. The vast majority of Tibetans actually support the Communist Party because they remember how cruel the former government was.

    The Communists who ousted the former rulers of Tibet may not be angels but they are vastly kinder and more enlightented than the Dalai Lama and his cronies were, and the people know it. The ancien Tibetan regime was literally a slave state, and most of the people are vehement about not wanting their former owners back. The Tibetans you hear from most loudly are of course those very owners, or their descendents in exile, who naturally dream of their former cushy lives. Existence is so much more comfortable when one is served at all times by cringing slaves.

    You probably remember the riots in Tibet last year, just before the Olympics. What the propaganda outlets in the West have concealed from you is how small those were: a few dozen agitators, at the very most, were involved; the vast bulk of the Tibetan population was completely uninterested. The Communist Party has been doing a good job in China, Tibet included, and the people recognize that.

    If you thought the Dalai Lama has renounced slavery or he wouldn’t have been Nobel laureate for Peace, you would be wrong. He has not because he cannot. If he ever spoke out against slavery, he would instantly lose the support of all the other former slaver masters — which is practically all the important people in his government-in-exile. And regardless of his stance on slavery he would have trouble holding onto power if he ever became the supreme ruler of Tibet once more. The Nobel Peace Prize will not make the ordinary Tibetan forget the slave whippings.

    Do you understand now?

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