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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 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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