Disingenuous New York Times Story on Global Imbalances

Since I am endeavoring to spend some time with my family, forgive me for dispatching this New York Times story, “Dollar Shift: Chinese Pockets Filled as Americans’ Emptied.”

The article buys, hook, line and sinker, then- Fed-governor Ben Bernanke’s depiction of so-called global imbalances (the US borrowing from abroad to fund overconsumption; Japan, China, Taiwan, and the Gulf States running significant, persistent trade surpluses and oversaving). Bernanke chose to position the problem as a “savings glut” which had the convenient effect of placing responsibility for the problem overseas, particularly on the Chinese, who kept the renminbi cheap via a hard peg to the dollar. Key bits:

In March 2005, a low-key Princeton economist who had become a Federal Reserve governor coined a novel theory to explain the growing tendency of Americans to borrow from foreigners, particularly the Chinese, to finance their heavy spending.

The problem, he said, was not that Americans spend too much, but that foreigners save too much. The Chinese have piled up so much excess savings that they lend money to the United States at low rates, underwriting American consumption.

This colossal credit cycle could not last forever, he [Ben Bernanke] said. But in a global economy, the transfer of Chinese money to America was a market phenomenon that would take years, even a decade, to work itself out. For now, he said, “we probably have little choice except to be patient.”….

Yves here. As far as I am concerned, this was rationalization of a clearly unstable and unsustainable pattern. But rather than try to find a way out, or at least keep it from becoming more pronounced, Bernanke recommended doing nothing. And it was NOT a market phenomenon, but the result (on the surface, at least) of China pegging the RMB at an artificially low level. Did we explore the possibility of WTO sanctions for the currency manipulation as an illegal trade subsidy? Apparently the US was acutely aware of this as a possibility, and took great care not to give private parties any grounds for using the RMB as the basis for a WTO action. This comes late in the article:

At the last minute [in 2006], however, Mr. Bernanke deleted a reference to the exchange rate being an “effective subsidy” for Chinese exports, out of fear that it could be used as a pretext for a trade lawsuit against China.

So we knew we had the nuclear option in our hands, and there was no will to use it. One has to wonder if there were any threats made in private. My gut says no, given the history here.

Back to the piece:

China, some economists say, lulled American consumers, and their leaders, into complacency about their spendthrift ways.

The problem with this characterization is it make the US a passive party and a victim in a paradigm that we embraced. And let us not forget it takes two to tango. If China ran a savings glut, the rest of the world in aggregate had to consume (overspend and borrow enough) to take up the slack. But it most certainly did not fall upon the US to put up its hand and do it virtually solo (the EU runs a slight trade surplus).

Funny, some (many?) Chinese bureaucrats say that the US conned China into taking worthless paper (US Treasuries) in return for valuable Chinese products. Two can also play the blame game.

And the New York Times buys hook, line, and sinker into the “gee, we really had no choice” party line:

To be sure, there were few ready remedies. Some critics argue that the United States could have pushed Beijing harder to abandon its policy of keeping the value of its currency weak — a policy that made its exports less expensive and helped turn it into the world’s leading manufacturing power. If China had allowed its currency to float according to market demand in the past decade, its export growth probably would have moderated. And it would not have acquired the same vast hoard of dollars to invest abroad.

Others say the Federal Reserve and the Treasury Department should have seen the Chinese lending for what it was: a giant stimulus to the American economy, not unlike interest rate cuts by the Fed. These critics say the Fed under Alan Greenspan contributed to the creation of the housing bubble by leaving interest rates too low for too long, even as Chinese investment further stoked an easy-money economy. The Fed should have cut interest rates less in the middle of this decade, they say, and started raising them sooner, to help reduce speculation in real estate.

The story also conveniently makes the global imbalances problem sound as if it is all about the US and China (and by implication, of relatively recent origin) when in fact it has long been in the making but the vital indicators moved into the danger zone in the post 2002 era (US trade deficits rising to unprecedented levels as a % of GDP, savings plunging to zero) and were ignored.

In fairness, the Times piece later suggests that the Greenspan Fed was far too sanguine, that the Chinese were highly resistant to pressure regarding revaluing their currency, while the Japanese went along with the 1985 Plaza accord which called for a stronger yen (I remember when it was 250 to the dollar).

While we admittedly have more leverage over Japan than China, the flip side is the Chinese wanted badly to win on this issue and we caved. I sincerely doubt we tried very hard, since as the story clearly indicates, the officialdom rationalized global imbalances as a “market phenomenon” when it was anything but.

The article points out that we used cheap Chinese funding poorly:

But Americans did not use the lower-cost money afforded by Chinese investment to build a 21st-century equivalent of the railroads. Instead, the government engaged in a costly war in Iraq, and consumers used loose credit to buy sport utility vehicles and larger homes. Banks and investors, eagerly seeking higher interest rates in this easy-money environment, created risky new securities like collateralized debt obligations.

Let us turn to economist Thomas Palley for an alternative point of view as to where the problem originated, which in turn suggests other courses of action. Note that the material from Palley comes from 2007 and early in 2008, yet the Times gave no consideration to his or other dissenting-from-orthodox views.

Palley starts with the observation that our recent expansion was unbalanced. He sees the big problems as record trade deficits (the result of an overvalued dollar), and (related but somewhat separate) the erosion of manufacturing.

The emphasis on the role of manufacturing is interesting and credible. When you consider the lead times, inflexibility, and transportation costs of manufacturing in Asia (remember, even goods like furniture, which involve round-trip shipping, are often made in China) one has to wonder how we screwed up, particularly when I hear from clothing designers that the reject rate on Chinese garments is typically 50%.

One would think there would be a role for at least for highly-flexible, high quality manufacturing that took advantage of geographic proximity, ability to do small runs at competitive prices, and high reliability. It would never be as large as China’s output, but it would cream the high end of the market (and with them, presumably high margins) and also keep core skills at home. And the US is still competitive in highly capital intensive and highly demanding manufacturing, such as coated paper (unlike newsprint, coated paper production is very difficult to keep running at the near-constant output level that its huge capital base requires).

Part of the problem, as we have discussed earlier, is that we have taken a naive stance in trade negotiations. We seem seduced by the idea of open markets, when in fact what we have is a system of managed trade. And our trading partners, who for the most part are keen to preserve employment, protect certain key industries, and have trade surpluses, seem to have achieved better outcomes than we have.

A 2007 Wall Street Journal article, “Is Productivity Growth Back In Grips of Baumol’s Disease?” supports Palley’s hypothesis about the value of manufacturing:

In the 1960s, Mr. Baumol, now at New York University, and William G. Bowen, an economist who later became president of Princeton University, argued that because productivity growth in labor-intensive service industries lags behind that in manufacturing, productivity growth in service-oriented economies tends to sag.

Their famous example was a classical string quartet — there are always four players in a quartet and it always takes about the same amount of time to perform a set piece of music. You can’t get any more music out of the same number of musicians over that same period of time. Broadening that to other types of services, the implication is that rich countries such as the U.S. that tend to veer toward services would face higher prices as wages and costs rise….

Sectors where productivity is high and average labor cost low “are those things that can be automated and mass-produced,” Mr. Baumol, now in his mid-80s and still teaching, said in an interview. “And things where labor-saving is below average are things that need personal care — these are health care, education, police protection, live stage performance… and restaurants.”


U.S. job growth has been concentrated in those latter sectors. More than half of the 1.6 million jobs added in the private sector in the past year have been in food services, health care and social services. Food services alone account for more than 20% of all new jobs this year, including government….

Population aging will shift more of the U.S. economy toward one-on-one services. The Labor Department estimates that between 2004 and 2014, seven of the 10 fastest-growing occupations will be in health care, and health-care employment will double the national average. Employment in leisure and hospitality will also outpace the average, though not by as much

Palley argues that the Fed, despite having given lip service to global imbalances, is in fact operating from and supporting a flawed paradigm.

From Palley:

The U.S. economy has been in expansion mode since November 2001. Though of reasonable duration, the expansion has been persistently fragile and unbalanced. That is now coming home to roost in the form of the sub-prime mortgage crisis and the bursting house price bubble.

As part of the fallout, the Federal Reserve is being criticized for keeping interest rates too low for too long, thereby promoting credit and housing market excess. However, the reality is low rates were needed to sustain the expansion. Instead, the root problem is a distorted expansion caused by record trade deficits and manufacturing’s failure to fully participate in the expansion.

If the Fed deserves criticism it is for endorsing the policy paradigm that has made for this pattern. That paradigm rests on disregard of manufacturing and neglect of the adverse real consequences of trade deficits.

By almost every measure the current expansion has been fragile and shallow compared to previous business cycles. Beginning with an extended period of jobless recovery, private sector job growth has been below par through most of the expansion. Though the headline unemployment rate has fallen significantly, the percentage of the working age population that is employed remains far below its previous peak. Meanwhile, inflation-adjusted wages have barely changed despite rising productivity.

This gloomy picture justified the Fed keeping interest rates low. However, it begs the question of why the economic weakness despite historically low interest rates, massive tax cuts in 2001 and huge increases in military and security spending triggered by 9/11 and the Iraq war?

The answer is the over-valued dollar and the trade deficit, which more than doubled between 2001 and 2006 to $838 billion, equaling 6.5 percent of GDP. Increased imports have shifted spending away from domestic manufacturers, which explains manufacturing’s weak participation in the expansion. Some firms have closed permanently, while others have grown less than they would have otherwise. Additionally, many have reduced investment owing to weak demand or have moved their investment to China and elsewhere. These effects have then multiplied through the economy, with lost manufacturing jobs and reduced investment causing lost incomes that have further weakened job creation.

The evidence is clear. Manufacturing has lost 1.8 million jobs during the expansion, which is unprecedented. Before 1980 manufacturing employment hit new peaks every expansion. Since 1980 it has trended down, but it at least recovered somewhat during expansions. This business cycle it has fallen during the expansion. The business investment numbers tell a similar dismal story, with spending being much weaker than in previous cycles.

These conditions compelled the Fed to keep interest rates low to maintain the expansion. That policy worked, but by stimulating loose credit and a house price bubble that triggered a construction boom. Thus, residential investment never fell during the recession and has been stronger than normal during the expansion. Construction, which accounted for 5 percent of total employment, has provided over twelve percent of job growth. Meanwhile, higher house prices have fuelled a borrowing boom that has enabled consumption spending to grow despite stagnant wages. This explains both increased imports and job growth in the service sector.

The overall picture is one of a distorted expansion in which manufacturing continued shriveling while imports and services expanded. This pattern was carried by an unsustainable house price bubble and rising consumer debt burdens, and that contradiction has surfaced with the implosion of the sub-prime mortgage market and deflation of the house price bubble.

The Fed is now trying to assuage markets to keep credit flowing, and it will likely soon lower interest rates. On one level that is the right response and it may even work again – though it does increasingly seem like sticking fingers in the dyke to prevent the flood. However, the deeper problem is the policy paradigm behind the distorted expansion, which is where the Fed is at fault and where it deserves criticism.

The ideological and partisan Alan Greenspan wholeheartedly endorsed corporate globalization and promoted the White House and Treasury’s unbalanced expansion policies. The Fed’s professional economics staff also seems to have dismissed domestic manufacturing’s significance and endorsed corporate globalization in the name of free trade. Consequently, the Fed has tacitly supported the underlying policy paradigm that has given rise to America’s distorted expansion. Despite talk about reducing global financial imbalances, the Bernanke Fed still seems locked in to this paradigm and that is where constructive criticism should now be directed.

And Palley gave a broader view of the fundamental problem in an early 2008 post:

The last twenty-five years have witnessed a boom in the reputation of central bankers. This boom is based on an account of recent economic history that reflects the views of the winners….

That said, there are other less celebratory accounts of the Great Moderation [the post 1980 smoothing of business cycles] that view it as a transitional phenomenon, and one that has also come at a high cost. One reason for the changed business cycle is retreat from policy commitment to full employment. The great Polish economist Michal Kalecki observed that full employment would likely cause inflation because job security would prompt workers to demand higher wages. That is what happened in the 1960s and 1970s. However, rather than solving this political problem, economic policy retreated from full employment and assisted in the evisceration of unions. That lowered inflation, but it came at the high cost of two decades of wage stagnation and a rupturing of the link between wage and productivity growth.

Disinflation also lowered interest rates, particularly during downturns. This contributed to successive waves of mortgage refinancing and also reduced cash outflows on new mortgages. That improved household finances and supported consumer spending, thereby keeping recessions short and shallow.

With regard to lengthened economic expansions, the great moderation has been driven by asset price inflation and financial innovation, which have financed consumer spending. Higher asset prices have provided collateral to borrow against, while financial innovation has increased the volume and ease of access to credit. Together, that created a dynamic in which rising asset prices have supported increased debt-financed spending, thereby making for longer expansions. This dynamic is exemplified by the housing bubble of the last eight years.

The important implication is that the Great Moderation is the result of a retreat from full employment combined with the transitional factors of disinflation, asset price inflation, and increased consumer borrowing. Those factors now appear exhausted. Further disinflation will produce disruptive deflation. Asset prices (particularly real estate) seem above levels warranted by fundamentals, making for the danger of asset price deflation. And many consumers have exhausted their access to credit and now pose significant default risks.

Given this, the Great Moderation could easily come to a grinding halt. Though high inflation is unlikely to return, recessions are likely to deepen and linger. If that happens the reputations of central bankers will sully, and the real foundation and hidden costs of the Great Moderation may surface. That could prompt a re-writing of history that restores demands for a return to true full employment with diminished income inequality. How we tell history really does matter.

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  1. Richard Kline

    This piece (o’ craptastic propaganda) in the NYT was soooo mendacious that I had to quit reading it; that seldom occurs. The whole shilling thing is an attempt to whitewash the failure of regulators and alpha predators in the financial system, but most especially to excusify policy makers inside the Beltway. Like so much else in the New York Slimes. (Which, btw, may be headed for its own financial collapse this Spring when its revolver line gets pulled.)

    To boil this rotten article down to the single nubbin of cartlidge therein, it might be, “Oh, well we could have been mostly right about abdicating all responsibility for capital flows, but shucks we were only somewhat right for most of the time. Can’t blame us for a financial singularity in all fairness, are we right?” *pheee-yew*

    The fact that we are seeing odium like this wretched article suggests to me that in punditocracy is worried, following terrible holiday sales, that they will face some Real Questions from the public after the first of the year. And are trying to ‘shape the space’ of debate. My response?: Burn an NYT times today, and mail ’em the ashes. It’s not even good fertilizer since the ink is toxic.

  2. bg

    very nice piece Yves. So who is to blame for drug addiction, the pusher or the addict?

    China is an enormously inefficient manufacturer. Unless you are working around big equipment, there are cronic shutdowns, do-overs, and quality problems compared to US/EU/Japan manufacturers. But they more than make up for it with 20x lower wages. Despite the tone of the article, there is plenty of industry left in the US: auto, steel, aerospace, farming, food processing, medical. Most of what was sent to non-japan asia was low value, except semiconductor (taiwan) and a few other areas.

    When trade barriers rise, China will be crushed, and will rightly be indignant. Furniture factories were quickly restarting in the south (due to now reversed shipping costs), and there are still some significant contract manufacturing operations in the US (Jabil/Sanmina SCI). Manufacturing work moves pretty easily as product cycles are so short.

    Having worked with both domestic and overseas manufacturers, the domestic ones won hands down in every category except cost.

  3. Daniel

    At last, a US economist ridiculing this “saving glut” thing.

    Do not forget to tackle the abusive use of the word “mercantilism” made by politically correct economists as well…

    It is about time Bernanke leaves.

  4. Anonymous

    I have always regarded Baumol’s string quartet example as strange. I have a rather great number of recordings with operas and symphonies by the world’s best orchestras and singers. There must be the efforts of some thousand persons stored in analogue or digital form. I can listen to them conveniently at home whenever I want to a marginal cost which is only the electricity cost. The string quartet needs only play once to make a recording. Is that not a productivity increase?

  5. Richard Kline

    Yves: “Apparently the US . . . took great care not to give private parties any grounds for using the RMB as the basis for a WTO action . . . The article points out that we used cheap Chinese funding poorly . . . .”

    Let us ask ourselves why, and again why? Decisions of this scale have substantive reasons, and because of that substantive agendas, attached to them. To me, the issue has always been that the Bushies + Greenspin decided to fund their tax cuts (and secondarily their war) by using the savings of the heathen Chinee to pay for it (them). This is so obvious, but yet I see very little discussion _anywhere_ of this angle.

    This was not a simple decision, nor did the Bushies enter power with this objective. It may be hard to remember, but back in the first half of 01 Rummy and Dickie were gearing up to declare a New Cold War—against China. Yes, that was going to be their talking point, and Permanent Mobilization target for eight years. But nineteen guys in four flying bombs gave Rummy and Dickie a Big Big Wedding Gift (but left us the bill to pay it off). And our imports from China roared, but more importantly our US _debt sales_ to China soared.

    The problem for the Bushiecons, you see, is that there was and has NEVER been any way to pay for their permanent tax holiday for the rich. Someone was going to have to pay for it. And once the Bushiecons decided to have their tax holiday for the rich _and_ their neocolonial occupation of the Oil Swatch, there was really no way for the US Guvmint to pay for it, on their watch or the next half dozen they expected to elect-o-heist themselves into. Oh, and the Euronians made it plain even before Iraq was invaded that they were NOT going to pay for this one. What to do, what to do?

    “Got it, I GOT IT! Get the Chinese to pay for it. The dollar’s high, and they need to recycle our commercial IOUs; give ’em full faith and credit promising all. The dumbasses. Once they are in big, they’ll have to keep their mouths shut just like those Rising Sons in Nippon do.” Or words to that effect. I’m not saying that I see this policy as coming together that simply of quickly or even that overtly until 06 or so, but it did come together nonetheless, in my view. And this is why, by later 03, trade flows and currency flows between the Chinese and us Usonians became a taboo and highly protected subject inside the Bush Admin: This relationship was how they were going to finance prosperity (importjunk), victory (bomb da c-jocks), wealth (to high net types), and permanent re-election. Except the whole thing crashed just short of the 08 poll line. In that, as in all else, Dubya I and II were incompetants on execution.

    I find the China-bashing of ‘those dastardly mercantilists of the East’ really . . . bizarre. I’ve said so before in various ways. Look folks, how is it that you think that non-industrialized countries made themselves into manufacturing-financial powers? Bootstraps and the Old Schoool Try? Friends in High Places?? Everyone who has ever gotten big has done so by limiting imports, and scaling up manufacturing through exports. Yes, there are variations on a theme, but Everyone Does This the Same Way. Expecting the Chinese to let high value imports in to smother their own industrial scale-up is, well I know what _I_ think it is, which is probably what _they_ think it is, too, but let’s call it, in the spirit of temperance, special pleading for already favored sons. Have the Chinese kept their currency weak? Of course; do we expect them to play stupid? If we want something different, we need to _negotiate_ that. But instead of negotiating, in my view we got the scenario I outlined above, that the present Admin decided to take all the Chinese money they could get to fund their own personal mega-piggy tax-and-bomb policies.

    This is the great scandal which we are not protesting; instead, too many are swallowing the Blame the Yellow Peril meme, which is exactly where anyone and everyone in power in the US wants us to place the blame. I don’t. The Chinese cooperated with an _American hatched policy_ which I suspect they were privately guaranteed by the Admin was untouchable. That is called playing smart while our leadership sold us out naked. Now, in case you haven’t noticed, the Chinese can’t get out themselves without a nasty crashlet. We made the problem, and we need to act first to clean it up—but instead we are pushing US debt AS NEVER BEFORE upon the savings of the world. Who, then, is The Problem? In case no one touting Blame the Chinee is watching, those folks over there in East Asia have worked to push imports _everywhere_ in the world: they are non-discriminatory traders. I don’t doubt that the Chinese would LOOVVVVE to disengage from their three-legged hike with the American ‘failed state,’ but it’s just not that simple.

    Put the blame where it belongs, inside the Beltway and Lower Manhattan. And those who think that trade barriers will cripple the Chinese, you are, frankly, out of your mind. Trade barriers aren’t selective, and we will do more to crush _ourselves_ if we even try. Want to see the dollar collapse in a week?: Push for a trade barrier. And, btw, the Chinese are better funded and better conditioned to make it through a tight, bad, time if it comes to that. The idea, which I hear in many places, that the Chinese leadership ‘will collapse in ruins’ in such a situation is, I’ll be kind, uninformed and laughable. If the US provokes a confrontation, the Chinese populace which counts will back their leadership against hostile US actions, and their army will take care of the rest as needed: the US will be blamed for ruining prosperity it it comes to this, and that policy will be _easily_ sold there. Let us hope and pray we don’t go there. We need, in the US, to redevelop manufacturing, but doing this in a spite-the-rest fashion is frankly suicidal. I’m not for suicide.

    Then there is the issue of whether or not the US ‘was naive’ in sending manufacturing overseas. I do not think the US was naive, no. The point is that US policy makers on trade are wholly captive balloons of major US manufacturing and financial oligarchs. (I mean, y’all know this, it’s not a conspiracy statement but a matter of intertwined policies and constitutencies; y’know _socioeconomics_.) And the latter oligarchs HATE WAGE EARNERS, PERIOD, and were and are all too eager to shave ’em off the payrolls. This is not simply a matter of class hatred; really not. It was/is a pragmatic decision. Labor costs are big, and the biggest savings for manufactureres are to, well, get rid of labor. The problem, then, is how to put out a product. But the real _fat_ part of the profit, here, has always been in a) owning design rights, and b) arbitraging supply chain costs against market demand. The goal of most manufacturers was to liquidate their labor force and become product brokers, and even better financial arbitragers leveraged on their product lines and receivables. The US wasn’t ‘naive’ at all, because the goal of the oligarchs in this country for going on forty years has been to disentangle _their_ wealth streams from American labor. And policy makers, as well-placed footstools, did what they were told, and sold US trade on that dotted line. This outcome was more or less intentional.

    How did this oligarchy convince American voters to stand still while it happened. For thirty years, middle management and small entrepreneurs have also loathed wage earners. The, too, are only too aware that labor is a cost center while ‘productivity’ from the same or fewer workers goes directly into their bonuses/profits. So they voted Republican for the most part to kick wage earners hard under the table, and flat out the door when they thought they could get away with it. And this wasn’t naive at all: they all have known exactly what they were doing. [And for those of you who think I let labor off, they have all their own problems and follies, but this comment isn’t about them; some other day. Few are blameless, but let’s taken ’em in the right order, what?]

    But US corporate fascists never expected to lose control of their arbitrage nodes. By killing their currency, and crashing their banking system. That one was an oopsie. And middle management and small business owners never expected to kill demand by demanding a half dozen too many concessions from the rest of us. But now, here we are. Decision makers at all levels have been shaving their fellow citizens down for a generation: is it any wonder that too many of those citizens rather desperately if quite foolishly grabbed for Castles in the Sky?

    Don’t buy the Yellow Peril meme: it was our own wealth class which sold us short, our own middletier who said yessir and thumped asses, and the recent Admin which sold us stupid to pay for their rotten feed-the-rich policy. Blame where blame belongs, in the order it has been earned.

  6. k

    Another tidbit:

    When I read this NYT article article this afternoon (and before I catch Yves’s and Richard’s posts here), I thought it’s a hatchet job for the coming “trade war” with China. Rumors on the ground here is some Chinese analysts believe WTO will disintegrate soon, and the worst case scenario “every man for himself” may come earlier than most people predict.

    Very troubling.

  7. anon1

    The economic reality is that China provided vendor finance for the trade deficit. Their choice to buy treasuries was only one of asset allocation (or reallocation). The US fiscal deficit never depended on China for financing, nor did its fiscal expenditures on the Iraq war. Similarly, the idea that the US was “a good place to invest” is bunk in terms of the reality or even the potential. Certainly it has nothing to do with foreign central banks building up arsenals of US treasuries.

    The critical deception behind the “global savings glut” is that it’s not global. Of course an individual country’s current account surplus represents a “savings glut”, but that in itself is a meaningless tautology and says nothing about policy on either side. “Global” was the huge ideological lie.

    Palley is always worth reading.

    But I must be reading a different Times article. You can hate the Times for good reason, but this article is mostly a chronology of some facts and various perspectives on the thing. Have I missed something? Do I need a reading or vocabulary lesson? Or is it their failure to condemn administration policy that causes the outrage? Because they certainly haven’t omitted reporting on some of those counter-views.

  8. vikas


    excellent comments.

    Most frightening to me is that they might genuinely be morons, captured by their material and ideological circumstances, the equivalent within the policy elite of the shopaholic obesity epidemic amongst the populace.

  9. Anonymous


    Wrong on Cheney and Bush vis a via Iraq. Had nothing to do with 9/11. The Cheney Energy Commission said that 25% of our imports would have to come from Iraq. Invasion and occupation was agreed and planned in 2000. Terrible decision, but it explains detente with the Chinese. Work together on North Korea, free trade, no guarantee for defense of Taiwan, etc.

  10. Anonymous

    That’s what I saw, and see, happening. The truth is much more powerful and therapuetic. At least a solution is possible when the problem is framed correctly, in the disinfecting sunlight.

    So, the government is now engaged in massive debt stimulation to compensate for the decline in American income and wealth, brought about by the governments war on labor. Sounds about right.

    IMO, the academic community, or at least the pecking order, is guilty of aiding and abbetting. Modern economics appears to be in a winter of thought, tethered to an orthodoxy (free trade) that forces them to make it up on the fly (savings glut) with a pronounced retaliative, defensive posture against non-believers (protectionist).

    Today’s post and comments are so important, I hope Mr. O’Bama has a chance to read it.

  11. Richard Kline

    anon1: “The US fiscal deficit never depended on China for financing, nor did its fiscal expenditures on the Iraq war.” This is, of course literally true. The key word there, and in you whole comment, is ‘depended.’ Surely the funds for tax cuts and an occupation could have been raised, and in fact outright deficit spending could have managed them. But managed them _far less well_ with a significant differences in the domestic economy, the dollar, and etc. This is where we part company, and where your apparent redefinition of the thrust of my remarks becomes, to me, suspect. I never implied dependence. But the Potemkin Prosperity we have seen for seven years, that, yes, _did_ depend on placing mucho public debt. We ‘might’ have placed it elsewhere, but we did place it where it is now, and the resulting displacement of trade flows is entrenched because this had positive utility for the Admin. If you want to present some serious analysis for your perspective, anon1, I’d listen; not because I believe that perspective, which I do not, but because a substantive argument regarding why it is presumed by some that massive public fiscal deficits are unrelated to massively imbalanced trade flows may be enlightening.

    As to why you do not see the Times piece as a raging propaganda toutfest, I might come to a first hypothesis that your comfort with the present Admin can only be sustained by a salient disengagement with the facts of their actions. But you’re in a better position to answer your own question.

    Anon of 6:48, I think you misread me. I’m well aware that adventures in Oleostan were in the offing for the neocon lot. The timing is another issue. Playing without paying (presently) is another issue altogether. We have no disagreement; I’m offering a jaundiced but realist view of larger purposes on shorter time horizons here, ‘sall.

    Myself, I seriously doubt that the Thin Fresh Prince wants any part of a trade tiff with China. He gives much impression of lack o’ spine in foreign policy, though, and his retention and/or placement of others in positions of trade policy formation and exectuion lend no confidence to a wise trajectory, there. If Congress made angry trade noises from 22 Jan, I don’t see BO reigning them in. We’ll know a great deal more in six months. My advice: buckle yer seat belts, as our policy elite pancakes the greenback in a cornfield.

  12. anon1

    Richard Kline,

    “We ‘might’ have placed it elsewhere, but we did place it where it is now, and the resulting displacement of trade flows is entrenched because this had positive utility for the Admin.”

    Leaving aside the Times piece, this suggests you believe trade imbalances were driven by capital flows – that China’s purchases of Treasuries forced US consumers to buy at Wal Mart.

    I find those dots hard to connect.

  13. Anonymous

    • Nation states are constructs that are created, controlled, and exploited by the wealthy ruling elite.

    • Groups of migrant workers are also constructs that are created, controlled, and exploited by the same wealthy ruling elite.

    • Portability of manufacturing (fine tuned in Japan by western powers shortly after WW II), is a construct created and controlled by the same wealthy ruling elite to further exploit the people in Nation states, and migrant workers, by playing them one against the other.

    • Killing the currency, and crashing the banking system is not an “oopsie”. It is intentional and meant to further the goal of creating a two tier ruler and ruled world with the ruled in perpetual conflict with each other.

    • China bashing has a parallel in immigrant bashing. It is meant to further the goal of creating perpetual conflict in the ruled class. Don’t fall for it.

    • The ruling elite not only hate wage earners, they despise and feel threatened by a healthy middle class. Eliminating it is their goal.

    • Yes, we are all pigs, but some pigs are more responsible than others.
    The wealthy ruling elite pigs, because they control the rules on the global playing field, are most responsible. Their sell out politicians of both flavors, and in all corporate media, are a better target for your ire than the Chinese.

    Deception is the strongest political force on the planet.

    i on the ball patriot

  14. Independent Accountant

    Richard Kline:
    I am in substantial agreement with you. The NYT article was a piece of junk. YS nailed it.

  15. DownSouth

    Yves and Richard Kline,

    Wonderful, thought-provoking post and comments.

    Richard, if the corporate fascists and their policy “footstools” (and I would have to include Reagan and the Clintons in this category as well as the Bushes) are indeed guilty of crimes of commission, all of us are guilty of crimes of omission. All too many of us were beguiled by our bloated egos into buying into the idea that our society was to be populated by the “creative” ones, the ones who design the Nike shoes, letting those Chinese shumucks do the $0.10 per hour grind of actual manufacture. Kevin Phillips makes a rather well documented case that this type of cultural/nationalistic triumphalism is a twilight phenomenon characteristic of all empires in decline. So are the Bushes and their corporate sponsors the cause of the problem, or are they a symptom?

    That said, there seems to a hefty dose of deliberate distortion of the facts going on. Another meme I’ve discerned coming out of the right-wing think tanks, and echoed by its noise machine, is that “we’re all guilty of the mortgage meltdown.” Given that a full third of U.S. households rent, a full third of those who own their houses don’t even have a mortgage, that perhaps only 20 million households who have a mortgage are or will eventually go under water, and that many of those who find themselves under water will continue to make their payments even though they are upside down–estimates are that only 12 million of 116 million households will eventually default on a mortgage. So clearly we are not “all” guilty of partaking in the credit orgy.

    The mortgage meltdown was caused by the coporate fascists and 10% of the hoi poloi–certainly not “all of us.” And even some portion of that 10% didn’t willfully play along, but have become victims of illness, lost jobs, etc.

    The corporate fascists and their progenitors throughout history always seem to make the same error, however, wanting to slaughter the cow instead of milking it. I can already envision 90%+ income and inheritance taxes in the offing, and is that the swish of the guilotine I hear?

  16. Junos

    Yves, I think you, the NYT and America at large have extremely narrow view when it comes to loss of jobs and competitiveness, and the US trade deficit. There is often a tendency to frame the problem in economic terms (such as currency strengths, interest rates, CB policies) rather than the real economy works and what companies hope to see in order to create jobs in the US. Ecpnomists and financial folks tend to over-estimate their ability to diagnose problems and overlook very obvious facts.

    Currency (ie the strong dollar vis-a-vis the “weak” RMB) is only one of many reasons for the decline of US manufacturing and the US trade deficit. I say this because despite the weakness of the USD over the last 5 years, US companies have not stopped exporting jobs abroad between 2002 and 2007, and a much larger portion of skilled job losses have NOT gone to China. China makes a good scapegoat for the US just like Japan was the bete noir in the 1980s. A large portion of job losses have gone elsewhere: eg IT and electronic IC design jobs have gone to India, car parts have gone to Canada, Eastern Europe, Korea and Thailand, clothing and shoes have gone to Vietnam, Indonesia and Sri Lanka, sporting goods (Ping golf clubs) to Bangladesh, everything else to Mexico and Canada.

    I can think of at least 3 other reasons why US manufacturers have gone overseas:

    1) US pension and benefit costs are simply too high

    2) US taxation vis-a-vis foreign tax incentives (and other foreign government subsidies) makes the decision for US companies.

    3) US education system have failed to produce anything other than lawyers and bad accountants and failed to produce the middle layer managers so crucial to make operations work smoothly.

    I certain that, even if the US devalue by 50% and stop accepting influx of foreign “cheap” capital for the next 10 years, we would still not be able to create more and better jobs without fixing the 3 issues I mentioned.

  17. Anonymous

    Yves labels the Times article as disingenuous. Richard labels it as craptastic propaganda. Each label carries the charge of intentionality; that is, the writers/editors are accused of intentionally misinforming because of some agenda and objectives.

    Without speaking to or hearing from the writers and editors, it’s hard to know if these charges are merited. And, it’s also hard to know if the charges are unmerited. The point being that perhaps Yves and Richard are correct. And, perhaps each has missed the mark. Missed the mark, that is, with regard to the charges of intentional wrongdoing on the part of the authors/editors of the Times.

    This last point is key. Yves offers her own interpretation as well as points us to Palley’s. Richard offers his own interpretation. My comments in this post are directed at Yves’ and Richards’ charges of intentional wrongdoing. My comments are not pointed at Yves’ or Richard’s respective interpretations.

    Are the writers/editors of the Times malicious wrong doers who intentionally seek to mislead their readers about this material? Are they disingenuous?

    We don’t know unless we hear from them and have the opportunity to ask about their intentions as well as elicit evidence. These writers and editors, for example, could be insufficiently knowledgeable about related but critical matters of economics and finance (e.g. Palley’s point about manufacturing). They could be under deadline or word limit pressures. They might have written more into the article only to see it edited out. They could be parroting common wisdom without deeper intentionality.

    Or, they could be intentionally part of a larger effort to misinform the readership in order to serve the objectives of their corporate masters and those masters’ partners in the oligarchy that seeks to destroy middle and lower class Americans (indeed, middle and lower class people the world over).

  18. anon1

    I’m amazed you are all so blinded by your ideological hatred of the Times.

    Can you point to a single sentence, not taken out of context, that reflects some sort of reporting bias in this article?

  19. rdan

    I fired off this article early morning to the Angry Bears in astonishment. Wow. We were lulled?

    Greenspan never saw greed as a human behavior.?

    What a group…I am sure they noticed such, but where were the cautions from these men?

  20. Warren

    The net result of this credit scheme was the transfer of massive amounts of wealth into the hands of a relatively small group of extremely sophisticated and powerful financiers. The process of wealth transfer to this group continues via the “bailouts”:
    We are expected to believe it is all an unavoidable misfortune and that it is only coincidence that a certain small sector of society which controls the levers of power benefits at the expense of the many.

  21. S


    While I generally agree with the spirit of the posts, the fascist meme detracts from your salient points, which are close to spot on. After all, corporations are living breathing entities under the law. Moreover, the corporations, in their search for profitability, still employ the vast majority of Americans. Perhaps it is worth focusing on the GDP per capita gap – even versus the Eurozone. To wit, the problem may not be so much with the worker being squeezed, but with the worker being for too long overindulged. This coupled with the government policy of asset inflation created an air pocket bubbling under the surface, for which we are approaching max density.

    The geopolitical angle as regards Iraq may or may not be true. But with OPEC cutting 4 million plus barrels and counting, sighting Iraq newfound production of 2 million plus barrels sounds more like a tin hat new American century conspiracy. Clearly oil production and the great game are in play. But let’s not overlook Obama’s right hand man Brezinski and his fondness for the great game, only he prefers a northern Caucasian vantage.

    This fiasco lies at the feet of the unholy globalization alliance of left and right, enabled by the chorus of Central banks under direction of the villainous Fed.

    The greatest outrage of all is that Bernanke has a shred of his reputation intact. Not that SEC Chris Cox has anything to talk about, but his comments over the weekend about Paulson and Bernanke panicking and forcing the ban on financials gives you a window into just how wrong both of them were and continue to be.

  22. Stevie b.

    Yves “….high inflation is unlikely to return”.

    I suppose it depends on your definition of “high”, but many feel “unlikely” may be too long by 2 letters…

  23. don

    Funny how more credence is given to the price of currency than what under lies it.

    Funny how Paley attributes trade imbalances to trade imbalances.

    Lets get to the crux of the matter. Labor is cheap in China, and most of the rest of Asia, compared to the US (and Europe). So the real problem is labor cost imbalances.

    Is this not a symptom of the very nature of our global economic system: the constant search for global sources of cheap labor?

  24. jm

    Perhaps I’ve skimmed the comments too rapidly, but I see no recognition that the greatest losers in this Brobdingnagian vendor financing fraud run by the Chinese power elite are the Chinese people. Ballparking Chinese population at 1.4 billion, and foreign exchange reserves at $2 trillion, the Chinese government has bought at ludicrously high cost fully $1400 per person — $4,200 per one-child family. Since at purchasing-power-parity the dollar may be overvalued vs the yuan by as much as five times, this has been a very, very bad deal for China as a whole.

  25. Anonymous

    I think Anon1 needs a little help here.

    Having now read the NY Times article fully, I think it was more balanced than initially indicated in this space.

    I suppose one should naturally expect bloggers, and those who like to sound off in the blog comments space to criticize the traditional financial media [FT WSJ NYT]. Certainly, the financial media frequently [if not generally] inaccurately describe the economic/market events they write about, but to ascribe nefarious motives to the writers is a step too far [although I can understand how those who are addicted to conspiracy theories can make that mistake].

    I guess what I object to here is that the quality of the insights in the comments section fall far below those generated initially by Yves.

    Finally, while I do feel as if the best financial and economic insights these days are more and more being found on the various blogs [especially Naked Capitalism], the blogs do seem to attract comments of not the same quality.

  26. GloomBoom.com

    We need to get a grip here. It does no good to blame China or anyone else. What we need if fundamental change and it is going to be forced on us by reality. Fewer jobs, less spending, businesses close. This cycle will repeat endlessly in 2009 and beyond and Americans will start saving and spending less.
    Obama’s influence will be trivial.

  27. Anonymous

    Of course the NYT is a propagandist organ. I mean look at how easily Judith Miller’s role, ok she was a scapegoat, but the Times role in bringing us to war has been forgotten.

    Its very unfortunate that many people read the NYT, without knowing how to read it, sort of like Pravda in the Soviet 70s. If you’re reading it and not knowing the party line on any given issue, you can in no way get a grasp of any given situation.

    That said Yves, the one thing you leave out, is that economic policy of this country was tilted to the benefit of one and only one entity, finance, that’s who the Fed works for, thats who wins when the Fed is running the show, that’s who wins no matter who is running deficits or surpluses. That the whole thing was unsustainable, and losses are now mounting up even in finance, well that’s another matter.

  28. Anonymous

    Yves — The article didn’t upset me as much as it upset you. It got lots of on the record quotes that provide useful background for how DC viewed the issue. And you are certainly right to note that the whole notion that the flow from China to the US was a market flow is way off, and the notion that the flow from china to the us somehow shows the attractiveness of the US as a destination for Chinese investment is off …

    One small technical correction to your article though: the EU as a whole does run a deficit, even tho the eurozone doesn’t. And the expansion of the EU’s deficit since the end of 05 has offset much of the rise in the emerging world’s surplus. The US deficit hasn’t been the only counterparty to the savings surplus. It remains the largest offsetting deficit, but after the end of 05 and certainly in 07/08 it wasn’t the most rapidly growing counterparty.


  29. nanute

    GloomBooom.com said: Americans will start saving and spending less. My question is: saving what? Income inequality and the coming increase in the unemployment rate will make it extremely difficult for the average income wage earner to save any disposable income.

  30. capitalcalls

    i thought the article was fair too and agree with anon1’s views.

    the savings glut, asset bubble, and low inflation are somewhat related. the fact that there was a savings glut helped tame inflation, as it sheltered the effects of loose monetary policy from the rest of the global economy.

    the other thing to realize here is that it’s very hard to influence the market without unintended consequences. we need to remember the sentiment of 3-4 years ago when it seen as a once in a lifetime borrowing opportunity. it actually reminds me of current day, where we have many investors telling us about the once in a lifetime buying opportunity in various investment instruments.

  31. Anonymous


    Excellent and insightful analysis. Three points:

    1. I strongly support Richard Kline statement “The point is that US policy makers on trade are wholly captive balloons of major US manufacturing and financial oligarchs.” There is a lot of convincing evidence along those lines.

    I think that this policy was a couscous choice by ruling oligarchy as a way out of difficulties experienced by the US in late 70th and early 80th (see Jimmy Carter’s April 18, 1977 speech) and with minor modifications was in place since Reagan. If this is true then Clinton and Bush II administrations are links of the same chain. IMHO the key idea was to transform the country into Switzerland II by exploiting the dollar status as a global reserve currency (exorbitant privilege): a financial powerhouse with only secondary and selected manufacturing base (like Switch watches and cheese :-). That probably can explains huge political push to create for large US financial institutions the most favorable conditions in global markets. For example, there was a well documented push of large US financial institutions into China financial markets and other emerging countries markets under the false flag of globalization. China was more resistant then others but generally it was a successful global drive. Financial globalization was the game in US favor and a large proportion of financial fees for taking compiles public, merger financing, auditing, as well as stocks trading gains were pocketed by US financial institutions and investors.

    2. The process of intellectual degradation of ruling elite was at least partially consistent with was happened in other empires at the late stage of development (actually Obama’s calls for “perestroika” are sounding somewhat similar to the Gorbachov’s). And the level of intellectual degradation of Beltway and Wall Street elite is somewhat comparable with the last days of the USSR Politburo (actually Greenspan would a perfect member, both age-wide and sleaziness wise). As Down south noted “Kevin Phillips makes a rather well documented case that this type of cultural/nationalistic triumphalism is a twilight phenomenon characteristic of all empires in decline.” The current level of the US Exceptionalism and triumphalism is a very bad omen from this point of view.

    3. Substantial lowering of standard of living for US middle class is not unfeasible and may be even desirable as large part of the components of the current US standard of living is counterproductive (individual transportation using petrol-based cars is one; suburbia living is the second issue; medical costs is the third). As the current drop in oil prices is temporary, the transportation and energy costs are now the key component of equation, not a rounding error like they were for the last 70 years or so. Suburbia is both energy and transportation inefficient. The might means that some kind of “death of suburbia” is in the cards and the current housing crisis might be just a tip of iceberg of a bigger, more radical lifestyle changes. If this is true there might be no price recovery to the current generation of suburbia housing (future heating costs and transportation costs need to be factored in). Railroads revival and cheaper electricity might slow the process but I doubt that they can reverse it.

  32. CCz

    “When trade barriers rise, China will be crushed, and will rightly be indignant”
    More important than trade barriers is capital owners with patience for growth and impatience for profit. In my country (Portugal), despite the Chinese and the East Europeans: 90% of shoe production is for export (average price of a Chinese pair of shoes entering Europe is 2.95€, average price of a Portuguese pair of shoes exported 18€); 90% of furniture production is for export; textile exports started to jump in 2007…
    What is common to all of them? Smaller plants, they no longer compete on price, they compete on brand, on time, on flexibility.

  33. Anonymous

    the ones who design the Nike shoes, letting those Chinese shumucks do the $0.10 per hour grind of actual manufacture.

    The forgotten point here is the Chinese are still subject to supply and demand. They may have a bigger supply of labor than anyone else to keep those costs down, but you have to be concerned with their productivity rate. If a $1 and hour Chinese makes 4 usable pairs of shoes an hour while an $14 an hour US worker can make 8 pairs of usable shoes and hour, the Chinese shoes are cheaper but there is wasted labor in the rejected pairs and the raw materials; the so-called “labor advantage” is close to nil.

    Think of the early 80’s and the howls of protest on Japanese (and later Korean) “dumping” product at a loss. The Chinese do the same thing, only instead of dumping product at a loss, they dump service at a loss – and that service is shipping. With massively subsidized shipbuilding and freight handling, this is where the Chinese advantage comes in. But those costs will eventually catch up to China if they haven’t already. There’s always an end to subsidization pyramids, but in the early stages those who are in the industry but not in the pyramid are at such a disadvantage they usually can’t survive.

  34. CCz

    I'm no economist but that article of the WSJ "Is Productivity Growth Back In Grips of Baumol's Disease?" is strange.
    "Going back to Baumol's disease, it still takes a bartender the same two minutes it always has to make a gin-and-tonic." and the reference to labor-savings…
    Whenever I'm discussing productivity improvement and people only see cost cutting as the only way I allways show them this article “Managing Price, Gaining Profit” from Michael V. Marn & Robert L. Rosiello, HBR Sept-Oct.1992.
    People should think on value not on cost cutting.
    That bartender should be preparing other drinks in other environments, in order to atract customers and charge more.

  35. Yves Smith

    The New York Times article shows considerable evidence of bias. I doubt it was deliberate; reporters are (generally) only as good as their sources. But they treat the Bernanke “savings glut” hypothesis with a great deal of deference, giving it pride of place in the piece.

    Note also the title, “Dollar Shift: Chinese Pockets Filled as Americans’ Emptied,” That says that the Chinese impoverished the US. In fact, America overconsumed. We had a higher standard that we would have otherwise via overconsumption. Most economists would not see that as impoverishment. In fact, they would argue that the Chinese worker is the one who suffers. Chinese laborers have seen their share of GDP shrink in the recent expansion.

    There is also NO mention of Japan’s role as a major, continuing financier of our trade deficits. The Plaza accord discussion makes it sound as if Japan has played ball nicely while China hasn’t. In fact, Japan has used its crappy domestic economy as cover for the fact that is still has a very robust export sector.

    And who do they quote saying the US was soft in its negotiations with China? The head of the AFL-CIO, on the third page of the web edition. Given the anti-union bias in the US, many would discount this source.

    I could go on…

  36. dryfly

    Yves labels the Times article as disingenuous. Richard labels it as craptastic propaganda. Each label carries the charge of intentionality; that is, the writers/editors are accused of intentionally misinforming because of some agenda and objectives.

    Okay how about splitting the difference: A convenient misinformation?

    That work?

  37. Anonymous

    Pity the Times and its grim pigs. for the love of god!

    While it is inappropriate to direct the blame solely at the Land of Corrupt Committ(ed)ees, so it is with the NY Slimes. The money in newpapers has disappeared along with the hot lead vapours and typewriters. The writers are too busy staving off cynicism, alcoholism (countless isms), and unemployment. There is no prospect of success in confronting the editors/publishers/rich patrons. And no prospect of employment on the other end of the imagined confrontation. It is no garden of earthly delights.

    And no, I’m not a journalist or writer (that should be obvious by my prose). I just want to help y’all “read” and appreciate our present-day Pravdas. The real pleasure, and real opinions of the wrighters is found in the typos.

    (PS, I love the “couscous” choice in one of the above posts. That’s a keeper that, hopefully, will make an appearance in the vaunted papers of tomorrow)

  38. john c. halasz

    Whereas I’m sympathetic to Richard Kline’s POV and largely agree with it, I’d have a few nits to pick. For one, I don’t think it’s useful to readily fling around the term “fascist”, since that strips the term of its historical/analytic specificity, and renders vague exactly what forms of authoritarian mobilization and domination might be actually operative. (The Christian right, for example, is best described as phalangist rather than fascist, whereas corporate domination might well be much more fluid as to which particular nodes of ideological coercion it attaches itself to). And appealing against “oligarchs” is a bit archaic and rhetorical overkill, when it’s much more a matter of oligopolies operating in a supra-personal systemic dimension rather than of specific individual intentionalities. (Individuals or families are just as much operated on by, as operating on, aggregate system goals).

    That said, I would add on that rent-capture is the dominant driving force of oligopolies, especially MNCs, (rather than static profit maximalization), and the high dollar policy amounts not just to a device to lower labor costs, (“the rate of exploitation”, in an old jargon, though conventional market economics seems to possess no capacity to distinguish increases in the real distributable surplus product, leading to increased profits, from increases in the ratio of distribution of those surpluses to capital over labor), but to a means of seeking out and capturing rents from abroad, as well as domestically. (Smaller businesses operating in the shadow of the oligopolistic giants are then forced to follow similar cost-cutting strategies to at all survive). And needless to say, this rent-seeking largely operates through (over-)financialization of corporate operations, which draws rents off of the real productive economy, globally and domestically, and not just off the broad wage-class. Since the goal is the capture of rents, i.e., not just detaching them from underlying costs of production, but forestalling their further distribution, there results a decreasing appetite for renovating production through further real investment. (Why is there so little recognition that financial “asset inflation” amounts to a falling rate of profit through over-accumulation/under-investment of capital? The talk of a global savings glut is simply the obverse of an investment dearth). That both, globally and domestically, inequality/maldistribution of wealth and income has been on the rise amounts to an expression of successful rent-capture. Which results in further re-enforcement of the cycle of imbalances.

    As for Bushevik fiscal policy, tax-cuts for the rich and spending to distribute further rents to the cronies, providing a source of funding to perpetuate the political machine, tax obligations were simply converted into government debt obligations to the wealthy, who then effectively sold them abroad to finance foreign equity investment and corporate FDI abroad, at higher rates of return. Remarkably little attention has been paid to the U.S. external debt, (except for the likes of Prof. Setser), and that is because the NIIP, the official measure of U.S. external debt, has been shrinking a bit, even as huge CA deficits have been rising, due to a boom in foreign equity markets, (which, ex Japan, far outstripped U.S. equity gains). Needless to say, though that generated an illusion of sustainability to the U.S. CA deficits, they solely benefited the wealthy investor class and the MNCs, since anyone else had little participation in those foreign markets, while facing wage stagnation and increasing indebtedness, amounting to a further mechanism for increased inequality. At last sighting, the NIIP stood at just south of $2.6 trillion, but if one adds up all the CA deficits since 1990, some $2.9 trillion is “missing” from the NIIP. Now that foreign equity markets have collapsed, the NIIP is about to balloon. It’s only remarkable how little commentary has appeared on that specific issue.

    What we’re now facing is a twin global crisis of financial collapse due to excessive debt over-hang and emerging excess production capacity, since that capacity was built during the boom geared to excessive debt-financed consumption and continued to be built up based on illusory expectations and momentum from the boom. That leads to a somewhat paradoxical situation in which both excess debt and excess capacity need to be destroyed to re-balance the global economy. The political and economic means for accomplishing that outcome, especially in a coordinated and “orderly” way are by no means apparent. But it’s not clear that policies that replace “good” public debt for bad private debt, and attempt fiscal stimulus, whether to boost consumption or investment demand, especially when the motives to do so are felt most by the fiscally and externally indebted countries, which have the least capacity to do so, exactly fit the bill. Rather, unlocking captured rents, through increased taxation on wealth, (more than income), increased regulation, partial nationalization, and increased publicly deliberated financing and planning of investment would likely figure in any functionally efficient approach toward rebalancing incomes and output in a sustainable way and restructuring industrial production, but ideological barriers render such options unlikely.

  39. Eric L. Prentis

    President Bush/Congress allowed large corporations to ship US manufacturing jobs overseas, mainly to China and Mexico, in exchange for opening up their financial sector to US companies. The US real economy is sacrificed in the name of free trade, but is actually managed trade, to help the US financial sectors. Now that the financial system is bankrupt and only staying afloat through a reverse bank heist, i.e., the financial ruling class is robbing the Treasury of at least $3+ trillion plus dollars, apologists such as the NYT’s Mr. Mark Landler want the real economy to take the fall for the sins of the financial sector. BULL!!! The bankrupt financial system should be nationalized, a la the Swedish method, and the culpable board of directors, management, equity and debt holders be made to rightly pay for the corrupt and dangerous actions of Wall Street bankers. The tax code, used all these years to ship manufacturing oversees, should be reversed to bring these jobs home.

  40. anon1

    A lot of people have treated the savings glut thesis with deference. That’s a fact. I disagree with it strongly, but wouldn’t fault an article for reporting on it.

    Japan is not a continuing major financier of US trade deficits. It’s a financier of some of the earlier debt, but not of the emerging deficits. It hasn’t been building its position the way China has. Japan is yesterday’s story as far as that’s concerned.

  41. john c. halasz

    IIRC, Japan’s external surplus is around $3 trillion, maybe 2/3 GDP. That plus ZIRP has allowed Japan to hold down the Yen and maintain export surpluses, (while flooding the RoW with excess liquidity). And, of course, Japan’s large government debt is probably entirely domestically held, due to ZIRP. So, until just recently, Japan has been running export surpluses. Further, Chinese exports, though increasing in value added, have a large component of high-value imports from East Asia. So much gets attributed to China and its surpluses, that is actually an overall East Asian surplus. Japan deftly hides behind China.

  42. Oregon Guy

    If U.S. labor, labor benefits, and taxation cost have driven U.S. manufacturing offshore, what can we learn from Germany that would help remedy our economic problems? Germany remains an export powerhouse with a large current account surplus, a generous safety net, and one of the highest standards of living in the world. What is Germany doing “right” that we are doing “wrong”?

    One thing I have observed is that the Germany consumer buys less “stuff” and values quality more highly compared to the American consumer. That must help sustain a mercantilist trade position, but can’t be sufficient in itself.

  43. anon1

    TOKYO, Dec. 8 (Xinhua) — Japan’s current account surplus shrank for an eighth consecutive month in October, plummeting by 56.5 percent year-on-year to 960.5 billion yen, the finance ministry said Monday.

    The balance of trade in goods and services sank into the red, posting a deficit of 131.9 billion yen as the surplus in merchandise trade dived 87.2 percent to 145.8 billion yen while trade in services was down 4.2 percent to a deficit of 277.7 billion yen, said the ministry in a preliminary report.

    Meanwhile, the income surplus contracted 16.3 percent year-on-year to 1,209.1 billion yen.

    Analysts say that the yen’s continued appreciation will further trim the current account surplus as it discourages exports and cuts the income surplus.

    The current account balance, the broadest gauge of trade in goods, services, tourism and investment, is calculated by determining the difference between a nation’s income from foreign sources and payments on foreign obligations, excluding net capital investment.

  44. Anonymous

    Yves — there is no doubt that there has been a savings glut recently in the oil exporters and China, so Bernanke’s thesis has an element of truth. Actually it looks more true in the 05-08 period than back when he initially put it foward. See the data tables at the back of the IMF’s WEO. In both developing Asia and the oil exporters, savings was running over 10 percentage points above its average in say the 90s or even earlier this decade. The presence of a savings glut (glut meaning savings rising faster than domestic investment, so there was a surplus of savings to lend abroad even with historically high levels of domestic domestic investment) in much of the emerging world strikes me as beyond debate — and that surplus of savings by definition implied deficits (investment in excess of savings) elsewhere.

    I personally doubt there would be much debate on this point if it didn’t seems to shift blame for the crisis away from the US. I think we can debate whether the glut reflects excessive stimulus in the us that pushed up aggregate global demand and thus pushed up oil prices and chinese exports or whether it reflected in part policies in china and the gulf and russia — and we can certainly debate whether US policies helped to assure that much of the offsetting deficit (tho not all — especially after 06) appeared in the US far more than the presence of something of a glut. Unless the IMF data tables are off, the real debate should be over the role government policies played in creating the savings glut in key emerging economies.

    as for Japan:

    a) its surplus is declining rapidly now (and the yen is kinda strong … so whatever role the weak yen played, it shouldn’t play that role anymore — p.s. the yen was far weaker v the euro than it was v the USD) unlike China’s, even as oil/ commodity imports fall
    b) Asia’s overall surplus with the US rose from 02 to 06 (and asia’s overall surplus with the world rose through 07 — 08 will be shaped by oil) so it wasn’t just a shift in asia’s surplus to china. the big driver of the overall increase in asia’s surplus was china.
    c) I don’t think japanese monetary policy is the primary driver of the increase in east Asia’s surplus; china’s exchange rate policy (and associated policies to restrain domestic demand)

    John Halasz — I suspect that if you looked closely at some recent IMF and World Bank work you might have a bit less confidence in the argument that China’s surplus reflects the surplus of others in East Asia. One definiting characteristic of the post-04 boom in China’s exports is that it wasn’t matched by a comparable boom in China’s imports from the rest of the asia, as china started doing more parts production/ chinese value added likely increased. that helps to explain the large increase in china’s overall surplus since 04.


  45. Glen M

    Part of me believes that the reason that this trade imbalance and the role of currency manipulations has been allowed to fester is that of liability.

    US officials both confirm and deny that China has been manipulating its currency to garner a trade advantage. The treasury, while detailing the means in which China does this, will not go so far as to label it ‘manipulation.

    Perhaps the US being so litigious, fears the vicarious liability ti would face by the millions of unemployed whom lost there jobs in manufacturing.

  46. Anonymous

    Eric Prentis, this round of globalization began with Carter who latched on to the concept to inject funds into the languishing 1970’s era economy. Each President and, more importantly, each Congress has moved us further towards unregulated globalization exacerbated by the repeal of bankruptcy laws and neutering of federal oversight functions. Nobody was more pro free-trade than Bill Clinton. He created NAFTA, which expanded Reagan’s free trade zones. While Bush continued this doctrine, he’s not the one who set it in motion. It is lack of balanced trade that has sent our jobs overseas (mine included). This is a US GOVERNMENT problem associated with “special interests” and their influence, not just a Republican problem. I’m a Democrat and voted for Obama, but the Democrats have been just as culpable here. As an example, Senator Barney Franks cast horrible aspersions on GAO regulators when they warned him about lending practices at Fannie Mae and Freddie Mac. I blame the banks as much for this bubble and mess as anyone. It was their lobbying that resulted in deregulation.

  47. GG

    “…we have taken a naive stance in trade negotiations. We seem seduced by the idea of open markets…” Nope. The US exactly knew what it was doing, which is what it does best, i.e., exploiting the rest of the world. It issued rapidly depreciating IOUs to the rest of the world in exchange for REAL goods and services. Now it is printing more dollars to fund bailouts of the US elite; in effect transferring wealth from China, Japan, etc. to “favored” parties in the US, as the collective future purchasing power of their reserves is diluted. Who is the bigger loser here? Despite attempts by the media to direct public anger to “foreign” nations, it is China which is the loser. Think about it like this – since the US alone has the power to print dollars, every dollar denominated asset in the world is, in effect, US property (such as oil). Take this argument a bit further, and any country with a significant portion of its reserves/wealth dollar denominated is tied at the hip to the US, and, in effect, US “property”. This imperialism 21st century style. The game has been played brilliantly by the US. This real state of affairs is only understood best by those with a good grasp of monetary science, and they are a very tiny minority today.

  48. Michael

    As always, The Onion has our number (note that this is from 2005):

    Chinese Factory Worker Can’t Believe The Shit He Makes For Americans

    FENGHUA, CHINA—Chen Hsien, an employee of Fenghua Ningbo Plastic Works Ltd., a plastics factory that manufactures lightweight household items for Western markets, expressed his disbelief Monday over the “sheer amount of shit Americans will buy.”


  49. john c. halasz

    Prof. Setser:

    You’re the acknowledge expert on current data, and I won’t directly challenge your points, as I’m not tight with all the data, but rather a bit out of date. Still, the rough point about Japan is that stocks and not just flows continue to matter. (And, of course, I did mention both recent drastic deterioration in Japan, and increasing value-added in China, though I would tend to take official statistics, of all sorts, with a grain of salt, since, in this particular case, transfer pricing by MNCs for tax- arbitrage reasons, both formally and informally, i.e., by “lobbying” the local nomenklatura, might be influential). My main point is that I don’t find the “blame-the-Chinese” line plausible, since I don’t think the Chinese have been exactly in the driver’s seat throughout, and see their policy-decisions, to the extent that they are a coherent whole, as partly reactive to a broader environment, (though probably they are caught up in contrary, conflictual domestic interests, like everywhere else). But I do see a three-way game-of-chicken having been played out between the U.S., EU and East Asia, concerning trade and currency balances, with the U.S./Bushevik policy being the most unilaterally aggressive.

    What’s going on in the “minds” of the Red Chinese is always a speculative mug’s game, though certainly their acquisition of national power/status through technological development and not just a narrowly defined goal of optimal economic development, in terms of current valuations of “factors of production” is clearly at stake. Still, the Polish paper cited Kirjan above is worth a gander, if, alas, a bit out-of-date. The upshot is that if one removes an full-employment assumption from exchange-rate equilibrium and calibrates Chinese policy to the goal of achieving fuller employment, then Chinese policy might be seen as in equilibrium to their own policy goals.

  50. john c. halasz

    “The game has been played brilliantly by the US.”

    So, GG, is that in the same sense that the game was played brilliantly by German General Staff? Who is the “we” in the US?

  51. Independent Accountant

    The savings glut hypothesis is nonsense. Mao ZeDong is turning over in his grave. The capitalist warmonger, exploiter Americans are enslaving the Chinese working class by buying goods made with Chinese labor and paying for these goods with US dollars which will never be redeemed in real goods. Pity the members of the Chinese working class.

  52. GG

    @john c. halasz

    First, when I say the game has been played brilliantly by “the US”, I mean the people who are part of the power structure and benefiting the most – the FIRE guys – the top 1 % who control a majority of wealth and have been increasing their share of it on the backs of workers all over the world including the US – precisely because they have been playing “the game” well.

    Now, the “we” that Yves is referring to (and I may be wrong) is probably US citizens together with the US government, and somehow assuming that the former has any influence on the latter. The truth is that US Government, dominated by FIRE special interests, is more like an Aristocratic corporatism.

  53. Richard Kline

    So anon1, sorry to be so long replying; I work nights and sleep days. anon1: “Leaving aside the Times piece, this suggests you believe trade imbalances were driven by capital flows – that China's purchases of Treasuries forced US consumers to buy at Wal Mart.” Well no, I certainly believe no such thing. Nor is it evident that you do, so the purpose of a straw man example is opaque. But let’s consider this more deeply. Wal Mart obtains supplies from many sources other than China, so I’ll dispense with them and ask, if there is a linkage between Treasury prices and consumer nondurable import prices mediated via the Chinese, what is it? Low interest rates. _Artificially_ low interest rates.

    The prices of those nondurables are substantially a function of their production and transport costs, yes—but we aren’t buying them for cash. We are financing them. Who’s lending the money? The vendor—but in our currency. So as I think you understand, anon1, keeping those consumer costs low, low, low is largely a function of keeping _US rates low, lowered, downright low done_. Given the US fiscal situation of the last eight years at least, there is no way that THE MARKETS, i.e. large private borrowers and bond investors, can, would, or will drive US rates _down_. It takes public intervention to keep those rates down. Who is intervening? Well, the Fed sets our rates; they can’t keep them there, of course, if purchasers of Treasury debt don’t comply (or at least they can’t without inflating credit, which they want to pretend they aren’t doing anyway separately). And the principal reason that the Treasury has been able to actually sell at yields which align with excessively low Fed policy rates is that foreign central bankers have been _overpaying_ for those Treasuries. The principal purchasers have been, well, _China and Japan_ to support their vendor financing. There are other macroecon factors why they and other central banks have been overpaying for excessive quantities of US PUBLIC debt, but this is the equation. And it starts at home, brother, when the Fed scams a rate and the Treasury runs wheelbarrows out the door, speaking metaphorically. —And then too many fools want to blame the Chinese for buying at the price we set! Go figure. Yes, of course they have their ulterior motives (who doesn’t?) but they are playing the game; we’re running the game.

    The relationships aren’t simply billiard-ball style causation of 1 >> 1 outcomes; they are systemic balances where inputs in one location and outcome at another maintain an overall systemic state. Yes, yes, it’s all a bit more complicated than the above sketch, which in no way compromises the basic validity of said sketch. But we cannot support that low rate matrix—upon which everything of the last eight years has hinged—without that Treasury issuance, which—surprise, surprise—dovetails exceedingly well with the larger purposes of the recent Administrations. I think Greenspin sold the Admin on this; the latter weren’t smart enough to put it together, but after Sep 01 when St. Alan had to give them a crash course on Macrojiggery 501, the Admin came to understand that they could issue all the debt they wanted to _and far more_ with no penalty (rates) because that’s how the players were wired into the systemic state. That they could have their tax cut and eat all the cake they wanted to, because the tab was on the Chinese. Until our banks blew up.

    So Independent Accountant, well I was rambling around a bit, and I certainly can’t prove every assertion I forced upon all assembled, but if the takeawy held together my purpose was served. What really got my dander up was the sheer mendacity of that article in the Times. Now, I read the Times most days with open eyes because it is the mouthpiece of much of the power elite. If the CIA wants you to ‘know’ something, it’s there. If the ibanks want you to ‘know’ something, it’s there. If the Beltway wants you to ‘know’ something, if Israel wants you to believe something, it’s all there. Pure propaganda on the rocks, no chaser. All you have to do is add back in most all relevant history and a handful of salient but omitted facts, and you can see exactly how day-by-day reality has been redacted for public flummoxation. It’s instructive. But this particular tissue of distortions was so egregious, and its attempts to _deliberately_ mislead readers so blatant, that to me it was far over the line of everyday dissembling.

    So DownSouth: “Kevin Phillips makes a rather well documented case that this type of cultural/nationalistic triumphalism is a twilight phenomenon characteristic of all empires in decline.” I don’t know that I’d say triumphalism is only associated with empires in decline, but it does seem to me to fit the final plateaus of long upswings, so to speak. Which is exactly where the US is now, yes.

    On the subject of “Everyone is culpable,” don’t you just choke on the hard right’s constitutional inability to ever take responsibility for ANYTHING that goes wrong? There is always someone else they are quick and ready to blame, and if really this is just not conceptually possible then they simply lie and lie again. This, to me, is the signature of something rotten in the mind and sole of deep American conservatism of the last generation. One might find in their social criticisms a few crumbs of reason, or at least worth discussion. The pathological avoidance of responsibility utterly repels me.

    . . . Although there is a real grain of truth in this recent assertion, if a monolith of falsehood. Consider one of your own examples, those homeowners who hold their titles free and clear. They can’t be ‘to blame,’ right? Well, by just sitting there, the appraised values of their titles have gone up fabulously in many areas of the country, whether or not they did _anything_. And few of these folks asked any questions regarding the price vector. I mean, who would, sitting where they have sat? And some of them _will_ have changed their _other_ spending expectations and actualities based upon those rising values, not to refinance, but to take on debt of draw down savings elsewhere.

    I have watched my society go nuts for pie in the sky over the last fifteen years, after watching them sniff and scrabble after the same for the fifteen before: Very, very few have asked any real questions because phoneyly rising stock and then housing prices were much the answer to many, many prayers. The reality, yes, is that some are _far_ more culpable than others in enabling, directing, and profiteering in all this. But our society has been sick on toxic fumes and gluttony. Not to sour like a sour sonofagun, but. The American public just hasn’t wanted to know, and that is on the most of us all.

    So Juno: “ . . . [D]espite the weakness of the USD over the last 5 years, US companies have not stopped exporting jobs abroad between 2002 and 2007, and a much larger portion of skilled job losses have NOT gone to China. China makes a good scapegoat for the US just like Japan was the bete noir in the 1980s.” Succinctly put, and dead on; all of this _outside_ the ‘manipulative Chinese’ meme.

    But I’m less sanguine about the focus of the three concerns you raise. I would dispute the idea the US pension &etc. costs are “too high” for US manufacturing to stay competitive. US health payment matrices are wildly mal-designed, to rake off profits for the middleman. That was intentional, but makes these systems function badly. US pensions as a whole are consistently _underfunded relative to Europe_, our closest comparable. There are two real problems here. One is that our expectations of profit structures for equity and bondholders in manufacturing are distorted. If we actually took the cash flow to see to those pensions and health payments, manufacturing would be more of a break even affair. For the country and its citizens, that’s a win; for corporate wealth, that’s diarrhea in a Dixie cup. Which is why we need an industrial policy to keep corporate wealth from harming the country’s citizenry in an effort to improve the former’s already egregious standing. The other problem here is that it’s stupid to pile all of the costs of the country’s pensions and health on company-specific payroll bases; this is just assininity and greed. The costs of pensions and health need to be spread society-wide, and paid out society-wide. That means, yes, differently apportioned and often higher taxes on the wealthy and the entrepreneurs, in return for which they are alleviated from direct responsibility for pensions and health funding other than what they negotiate separately with their employees. The whole design of these systems in the US was deliberately fudged and warped from its inception in the 1930s: we did a bad job, and not we have to do a do-over.

    Regarding what education turns out, it’s a free society, and you can’t force anyone to study and labor in areas where they do not desire to labor. OTOH government could give inducements to those who take education and employment in areas which were deemed socially desirable—egads, did I just imply socialism? Again, the US is stupid in this because we have to drag a third of our population kicking and screaming to a better way for all; it’s exhausting, and so no wonder that most policy makers just give up with half measures, or take a pay/tradeoff to do nothing. And so on.

    So Anon of 9:36 AM: “Are the writers/editors of the Times malicious wrong doers who intentionally seek to mislead their readers about this material? Are they disingenuous?” I do not accept that the authors of this article are too stupid or the editors are too narrow to misunderstand what they are doing. They are responsible for the impression which they create, and that impression is _fundamentally misleading_. Furthermore, I read this paper ALL THE TIME, and in may view as a reasonably informed reader, the impression which they create _is_ deliberate, and in keeping with consistent editorial policy. Any attempt to qualify them off the hook for what they have wraught strikes me as grossly misinformed, not to attack you personally, but. And no, anon1, I am not going to do the work of deconstructing their malware for you. Bias?: methinks that shoe is on your foot, brother.

    So S at 10:45 AM, I will admit that my invective and I run away with each other at times; I indulge myself, to be sure. At the same time, I look at the larger purposes of actions to see political agendas embedded therein, and in doing that I don’t let policy implementors off the hook. Many don’t think of themselves as fascists; in that, I’m sure your emphasis is correct. When we hear of ‘adversarial relations,’ though, this has somehow become a synonymous phrase with ‘labor militancy.’ Rarely so; typically no. Read a running account of most any large HR departmental actions, and there is no other understanding for corporate labor _policy_ in its effects than what I discuss, here. There is often a rational reason for every act of malice and niggardly inaction, but the sum total is blank hostility to those employed. This is embedded, and if you can’t see it I would suggest that you look again. Labor may or may not be coddled; that is arguable, and in some cases, yes surely, provable. But in most all cases, even these, labor is squeezed EVERY SINGLE DAY IN EVERY SINGLE WAY and the corporations never sleep but always keep pushing to move any and every peg _down_. No matter how much this is against even their own larger long term interest, because everything in CorporCity is managed for the short term. That is my observation and experience, and I stand by it, infective aside.

    I’ll end it there rather than take more of anyone’s time on this.

  54. Richard Kline

    So john c. halasz: “Christian right, for example, is best described as phalangist rather than fascist . . . .” Yes, that is a much more accurate term for the American Christian right. (I wonder how many other readers would know to parse the two? : ) ) I wasn’t referring to them specifically, more to the corporate side, but my remarks have been sufficiently sweeping so as to leave some misimpressions. My rhetoric is an indulgence at times, and I would suggest simply scrolling eyeballs by it if the substance of the rest holds true. I’ll only launch into that length of screed when I have my Scots-Irish stepped upon. Even better, expand in your own remarks, as the more refinement we get the better for all; I lay no claim to perfect interpretation here.

  55. Anonymous

    I get extremely tired of the American public being blamed for overconsuming and the ruining of the nation. Did the public send our jobs overseas? Does the public borrow money from overseas? Does the public have any input onhow products are made? No to all questions.

    If the public to blame for letting the government and corporations get away with ruining our country? YES!

    There are only 3 remedies. One, hope for the best and watch as the country becomes part of the NWO OWG. Two, the public needs to stop all payments to the corporations and government. That is the only way for a nonviolent revolt. Watch them implode and then takeover. Third, an all out revolt.

    The public needs to get off there ass and get it done.

  56. anon1

    Richard Kline,

    “So as I think you understand, anon1, keeping those consumer costs low, low, low is largely a function of keeping _US rates low, lowered, downright low done_. Given the US fiscal situation of the last eight years at least, there is no way that THE MARKETS, i.e. large private borrowers and bond investors, can, would, or will drive US rates _down_. It takes public intervention to keep those rates down …”

    Quite agree – that’s the (correct) view that undermines the pure simplicity of the savings glut argument.

    I suppose the reason I’m less upset with the Times article is that I’ve become used to not hearing that view. The savings glut perspective has become institutionalized in the popular culture, well beyond the Times.

    And although the glut view is embedded in the title of the article, it does note the existence of free will advocates, as in “The Fed should have cut interest rates less in the middle of this decade, they say, and started raising them sooner, to help reduce speculation in real estate”, and “The global savings glut story did us a collective disservice,” said Edwin M. Truman, a former Fed and Treasury official. It created the idea that the world was doing it to us and we couldn’t do anything about it.”

    I’m not the best student of either the explicit or the subliminal messages of this newspaper, but on re-reading the article, I still see only a reasonably balanced survey of various views and quotations of views on the subject.

  57. Yves Smith


    Consider the following:

    The article (part of the Times’ The Reckoining series) is meant for a lay audience to explain the financial crisis. Thus one should assume the reader does not have great familiarity with the issues.

    Other treatments of the “is it a savings glut or overconsumption problem?” treatments by economists (for instance, Martin Wolf in the Financial Times) have presented both sides of the thesis. Here, the “was overconsumption the cause” case is not given serious treatment.

    Now in fact, it is difficult to attribute causality in a neat fashion, both sides bear responsibility. But the thrust of the article is that this was a problem created in China, and that our efforts to address it (via getting the Chinese to let the RMB appreciate) were rebuffed. There is NO mention of remedies the US could have pursued.

    Note that the article uses the term “savings glut” repeatedly, but softpedals US undersaving/overconsumption. No mention that US savings had been dropping since 1980, before the RMB peg to the dollar was part of the equation, and reached 0. The turns of phrase to describe the US policies and behavior are far less judgmental than “savings glut.”

    The article also fails to mention that signs of overleverage in the US had started in 2002 (if not sooner), and there were remedies: raising US rates. a blunt tool, and regulatory intervention. But since no one treated this as a problem, there was no serious consideration of responses.

    Note also that that article concludes with Paulson saying in effect that the US was powerless until there was a crisis. We may not have been able to reverse the pattern, but we could have at least sought to hold it in place.

    The article presents the US as largely passive, except haranguing the Chinese about the RMB, and suggests not much could have been done. But the US was complicit with an overly lax monetary policy from at least 2002 and arguably sooner, and failure to consider other policy responses.

    Similarly, Greenspan noted approvingly of the infllation-taming effect of Chinese imports in the mid-1990s. But the only inflation that the Fed controls is the domestically generated sort. By looking at inflation stats that included a deflationary component (Chinese goods substituting for formerly more expensive US/advanced economy ones), he effectively was looking at a “wrong,” overly low inflation rate, and set monetary policy too loose. That was confirmed by his 1996 “irrational exuberance” remark, when he first notes the signs of asset inflation, then backed off when the stock market took badly to his comment.

    There is similarly no mention of

  58. Anonymous

    GG, you wrote:

    “… Nope. The US exactly knew what it was doing, which is what it does best, i.e., exploiting the rest of the world. It issued rapidly depreciating IOUs to the rest of the world in exchange for REAL goods and services. Now it is printing more dollars to fund bailouts of the US elite; in effect transferring wealth from China, Japan, etc. to “favored” parties in the US, as the collective future purchasing power of their reserves is diluted. …”

    While I agree tactically with your assessment of shifting wealth to the US elite, money is still perceived as having more value domestically. In other words, the diluting effects of the rapid creation of dollars is not fully realized. It has given China sovereign wealth funds/elite, in particular, the ability to accumulate vast commodity reserves and buy US assets that DO have real value.

  59. anon1


    Fair enough.

    It’s a crazy world. That’s the first time I’ve found myself inadvertantly aligned with the savings glut view.

    Thanks for the additional detail.

  60. GG


    “…the ability to accumulate vast commodity reserves and buy US assets that DO have real value.” I didn’t say China didn’t get nothing – why shouldn’t they? They worked for it – I’m saying that they are not getting their work’s worth, i.e., they are being robbed. As for the ability to buy US assets, protectionist US government has imposed severe restrictions on what China can or cannot buy from the US.

  61. Anonymous

    GG, as pointed out by the Peterson Institute (http://www.iie.com/research/topics/hottopic.cfm?HotTopicID=10), these restrictions have yet to be broadly enacted and remain quite controversial. My point was that we have created a trade deficit that is so skewed that, barring clear investments in strategic assets (e.g., ports), the US has positioned itself to be bent over and used; it’s not as one-sided as your argument seems to suggest. The only thing stopping China is fear of political unrest there and concerns about the effects of dumping reserves on their own profitability. Balance of trade, supported with careful regulation, is needed to prevent protectionism and class warfare.

  62. Juan

    john c. halasz

    Why is there so little recognition that financial “asset inflation” amounts to a falling rate of profit through over-accumulation/under-investment of capital? The talk of a global savings glut is simply the obverse of an investment dearth.

    Perhaps because orthodox and most heterodox economics do not have much if any rate of profit theory while, same time, tend to one-sided, demand based notions of overaccumulation and overproduction.

    B. Setser,

    Yes, a relative decline in China’s imports from rest of E Asia seems to have developed over the last years as does a rise in domestic outsourcing. Would you agree this has enhanced China’s vulnerability to crisis and, obviously, knock-ons to RoW?

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