US-China Pressure May Escalate Sooner Rather Than Later

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We and other cynics were very skeptical of the pre-G20 announcement by China that it was moving to a more market-oriented currency regime at some unspecified point in the future (particularly since China had said pretty much the same thing in 2005, and actually had committed to some baby steps then).

Now that it is clear that any action will be modest and very much delayed (or worse, has high odds of being a devaluation against the dollar if the euro falls further), the US is resuming the war of words against China, and it is Obama who is now applying pressure. Before, the criticism was almost entirely at the Geithner level or below, so this relatively mild statement so close to the G20 is more significant that it appears. From Bloomberg:

President Barack Obama said the U.S. will keep up pressure on China over its currency valuation to ensure fair trade.

“If China has a currency that’s undervalued, that makes our exports more expensive, it makes their imports cheaper,” Obama said in response to an audience question at an event in Racine, Wisconsin. “So we have been putting pressure on them to say, let’s make sure that we’re not favoring one side or another.”

Obama discussed currency policy with Chinese President Hu Jintao while both were at the Group of 20 summit in Toronto last week. Some lawmakers in Congress are pressing for stronger action, including letting U.S. companies seek tariffs on Chinese imports.

Yves here. The real determinant will be economic performance. If the growth falters and unemployment rises, which we deem likely, then the pressure on the president and Congress to Do Something will also rise. And the next window for certifying China as a currency manipulator is mid-October, temptingly close to mid-term elections.

China is almost certain to resist even token appreciation, both on general principle and given that its growth is easing off. While investment is now a bigger contributor than exports (and the two together are an unprecedented level of GDP), manufacturing growth is starting to ease off. And note China engaged in extraordinary stimulus measures in 2009, pumping $1.4 trillion of liquidity into its banks system (and unlike here, applying pressure for banks to lend). The impact of the falling euro (both on competitiveness of Chinese products, and on demand as austerity measures push the eurozone into deflation) will put a crimp into the export sector just as China is throttling back on loan growth. Again from Bloomberg:

China’s manufacturing expanded at a slower pace for a second month in June, adding to signs that growth in the world’s third-largest economy is moderating.

The Purchasing Managers’ Index fell to 52.1 from 53.9 in May, the Federation of Logistics and Purchasing said in an e- mailed statement today. That was less than the median 53.2 estimate in a Bloomberg News survey of 12 economists…

Qu [Hongbin, a Hong Kong-based economist at HSBC Holdings Plc,] said “resilient” private consumption and government spending on public housing will help to sustain growth.

That outlook hasn’t been shared by investors, who sent the Shanghai Composite Index to a 14-month low yesterday. The MSCI Asia Pacific Index dropped 1.1 percent as of 10:40 a.m. in Tokyo. The world is relying on China to help sustain a recovery that Group of 20 leaders this week described as “uneven and fragile.”

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51 comments

  1. S Brennan

    Currency valuation is a thermonuclear weapon compared to the wire guided missile of targeted tariffs.

    Children are immature, they can’t see the difference, but adults should, why can’t our “leaders”?

    1. M W M

      It doesn’t work either.

      1. Japanese Yen climbs from 300 to current 90 in the last 25 years. Yet, Japanese surplus to US stays the same with very minor interruption. Globally Japan wins in every single large category that they compete with US. (car, machines)

      2. Yuan re-evaluation 2 years ago, hardly affect china competitiveness (that was nearly 20% climb btw)

      US political class and most economist are in deep denial thinking that global consumer goods are just like agriculture or industrial widget. Instead, high value products are about logistic supply line and manufacturing facilities/workers.

      A lot of manufacturing ecosystem by now can only exist in china. ( consumer electronic, garment, telcos) because all asian supplier has factories there. Eg. One cannot make iPhone in the US without turning it into $800+ device. LCD, mobo, passive, screen are all made in china. Fosconn lines are in china. Apple has to build every component from scratch if they don’t want to import from china. They can’t even do it in Mexico anymore, because Samsung supply chain in china is so deep, flying everything to Mexico will add cost.

      If Apple is crazy enough to build $800+ iPhone in a brand spanking new US plant, than HTC will start selling exact same phone for $200 and 2 months earlier than Apple.

      Another example: shipping. It takes about the same time to deliver container from shanghai to LA or Mexico/chicago to LA. (6-12 days) Depending on ship traffic and port condition, shipping a container is actually cheaper from chinese coastal cities than from north america’s inland.

      China by now has slight fuel cost advantage due to middle east oil contract, and US/Israel/arab conflict.

      3. lastly US has lost control of its monetary policy because global trade in dollar is much bigger than US export/import. Dollar value is now determined externally instead of by federal reserve. Entire asia and latin america can absorb the inflation due to Bernanke printing money. China currently gobbles $.75 reserve a year, combined with rest of Asia and latin america $1.2-1.5T dollar can go under the mattress easy. US is not going to be able to print money much faster than that. That’s suicidal. that’s twice current federal deficit. Everybody has some sort of capital control to prevent ’97, ’08 hot money going in inflating-crashing currency. (swap agreement helps too)

      So, I don’t see how neoliberal fiscal/monetary policy will improve US situation. Ditching “free market” and start controlling exchange and export/import are the only way. (yes, trade war, basically)

      1. purple

        If production moves from China, it could very well go to Mexico. Mexico already manufactures many high-end technologies. There are also powerful conservative regional constituencies in the US (i.e. Texas, 2nd largest GDP by state) who would like this, which makes them a potential strange ally along with Midwestern unions and domestic manufacturers. If supply chains are now undeveloped, they could rather quickly be put in place.

        Keep in mind that ‘Washington’ is extremely concerned about destabilization in northern Mexico, giving it additional impetus to encourage further development there.

      2. alex

        “It doesn’t work either.”

        Then China should have no problem revaluing the renminbi. So what if it’s just a political exercise to mollify the US. Since, according to your theory, it won’t affect the US-China trade balance, why not do it just to demonstrate that it’s not the important issue?

        “Japanese Yen climbs from 300 to current 90 in the last 25 years.”

        Interesting cherry picking on the dates – 25 years ago was the Plaza Accord. It did work – between 1985 and 1989 the US trade deficit fell from IIRC 4% to 0.5%/GDP. Was that just Japan? No. Nor do I care. In 1985 the USD was overvalued against a number of currencies, and reducing Japanese currency manipulation dramatically improved our multilateral balance. The same would happen if we put an end to Chinese currency manipulation.

        And you forgot to mention that since around 1990 the US has had inflation while Japan has had deflation, so the same nominal exchange rate in 1990 would be an exchange rate that favored Japanese exports today.

        “Yuan re-evaluation 2 years ago, hardly affect china competitiveness (that was nearly 20% climb btw)”

        So why did China put a halt to yuan revaluation? Maybe they know something you don’t?

        “Instead, high value products are about logistic supply line and manufacturing facilities/workers.”

        True, which according to your logic is all the more reason China should be amenable to yuan revaluation.

        “A lot of manufacturing ecosystem by now can only exist in china.”

        Really? That’s the only place it can possibly exist? These things never move or change? So how did they get to China over the last 10 years?

        “One cannot make iPhone in the US without turning it into $800+ device. LCD, mobo, passive, screen are all made in china.”

        And other parts are made in Korea, Japan, Germany and the US. For someone who claims to understand global supply chains, you have a strangely myopic view. And how is it that you can economically ship assembled product across the Pacific but not components?

        You’ve also picked an extremely bizarre product to use as an example of shipping cost issues. iPhones and their components have a much higher value per pound than low-carbon steel – shipping costs are not a major issue.

        “Dollar value is now determined externally instead of by federal reserve. Entire asia and latin america can absorb the inflation due to Bernanke printing money.”

        So you freely admit that China, etc. are manipulating the value of the US dollar. Glad we can agree on something.

        “Everybody has some sort of capital control to prevent ‘97, ‘08 hot money going in inflating-crashing currency.”

        Good to hear it – yet another reason for China not to fear yuan revaluation.

        “Ditching “free market” and start controlling exchange and export/import are the only way. (yes, trade war, basically)”

        You’re more of a pessimist than I am. I’d hoped that the problem could be resolved more amicably, but if push comes to shove then a trade war it’ll have to be. Correction: we’ve been in a trade war for years, but we’ll have to start fighting back.

        1. Tac

          I think China, as well as a great many economists, does not see revaluation will help US deficit and trade balance. China instead would reform it’s currency based on it’s internal economic and political situations. There are no free lunches here for any country. It is a matter of choice.

          1. alex

            “great many economists, does not see revaluation will help US deficit and trade balance”

            Great example of the classical logical fallacy of appeal to authority. Would those be the same economists who failed to see an $8T housing bubble?

            “China instead would reform it’s currency based on it’s internal economic and political situations. There are no free lunches here for any country. It is a matter of choice.”

            The “reform” is to stop manipulating the US dollar. The yuan exchange rate is emphatically not an internal affair of China, but by definition an international concern.

          2. Tac

            Alex, wonder if you could show how you are more right in your view than those great many economists?

        2. M W M

          “And you forgot to mention that since around 1990 the US has had inflation while Japan has had deflation, so the same nominal exchange rate in 1990 would be an exchange rate that favored Japanese exports today.”

          Magic of accounting (you really think Goldman sachs is the only one who can fudge transaction?). From economic data, japan economy couldn’t possibly exist, yet there they are enjoying one of the highest living standard in the world. Longevity, low crime, huge forex, giant saving, their industrial output is winning in every market in the world. They export huge capital (Yen carry trade) that ultimately create US property bubble.

          “between 1985 and 1989 the US trade deficit fell from IIRC 4% to 0.5%/GDP. Was that just Japan? No. Nor do I care. In 1985 the USD was overvalued against a number of currencies, and reducing Japanese currency manipulation dramatically improved our multilateral balance. ”

          history:

          1. This is US japan trade balance history. The 3 years dip in late 90’s was Clinton trade war. (ever wonder why Japan hates the clintons?) But net export actually expanding after US “recovery” The big trends are “up” (Why do you think they never show chart in the US?) It underlines US fails trade and development policy in the past 4 decades.

          http://commons.wikimedia.org/wiki/File:Japan%27s_Balance_of_Trade_for_the_US_%281979_-_2008%29.png

          2. improving trade balance in the 90’s? Huge oil price plunge. From $40 to $20/barrel.

          3. Do you even remember what the 80’s 90’s Japan trade war was about? Sematec, DRAM, Cray supercomputer, SGI, Compaq, detroit, etc…? Do you keep track of the score? US lost the PC, vector supercomputer & DRAM war. (Cray, SGI, compaq, moto don’t even exist meaningfully anymore.) Japan is bleeding badly but still standing (NEC, Toshiba), while the real winners are Hynix, Samsung, and TSMC.

          Look at this ranking and sales trend. All US and Japan semis are dying. But Japan and Korea has FTA agreement with China. US has none. (Dell, TI, moto are living on borrowed time.)

          http://en.wikipedia.org/wiki/Semiconductor_sales_leaders_by_year

          4. look at japan ex/im stat.

          http://www.stat.go.jp/english/data/handbook/c11cont.htm

          5. Same thing in steel, ship building, car, telecom. (soon, airplane) In all these US only have bankrupt companies or hollow shell. google wiki for general stat and trend.

          “So you freely admit that China, etc. are manipulating the value of the US dollar. Glad we can agree on something.”

          Dollar value is subject to manipulation, just like IMF/Worldbank vote and power balance are rigged toward US. There is no such thing as “fair” in the world, China certainly is aware of all the rule/banking manipulation that goes on. (bretton wood, Plaza accord, Basell are all agreement fundamentally designed in favor of US position.

          It is completely naive to expect china & the rest of non G7 to follow those rules far into the future.

          They know all those institutions exist to perpetuate US post WWII win, not world trade/fair dealing.

          But, go ahead, calculate the cost of opening “new iPhone” production floor in mexico as an exercise. I want to see the effect of Korea/japan/China free trade agreement vs. you importing component from those area into mexico, than paying tax in mexico and US. Who is going to loan you money for opening that production line? The chinese? TARP money? Everybody is broke.

          The only way the world stop manipulating USD is by global forex reform, but that entails US losing it’s reserve status. Which means US has to compete on even ground obtaining natural resource, capital pricing, and not having big seat in world power bodies. (the post WWII gravy train arrangement is over)

          Otherwise, nobody cares. The game will continue since the other guys have nuclears and can easily threatened global thermonuclear game as well.

          1. alex

            “Magic of accounting”

            Ah, if the stats don’t support your argument, just assume that they’re fudged. It’s probably the Bilderbergers behind it.

            “They [Japan] export huge capital (Yen carry trade) that ultimately create US property bubble.”

            You’re about twenty years behind the times – it was primarily China’s capital exports that fueled the US property bubble. Not that that was essential – Ireland and Spain had enormous property bubbles without it.

            “This is US japan trade balance history.”

            a. As I mentioned, bilateral trade imbalances don’t matter as much as multilateral balances. The problem was that excessive Japanese (and now Chinese) USD forex accumulation pushes the USD up against all currencies.

            b. That chart is in yen, but what matters is %/GDP. Between 1985 and 2006 (the peaks on the chart) the US GDP (real dollars) increased by 88%, which means that as a %/GDP our Japanese trade imbalance fell nearly in half.

            “TI, moto are living on borrowed time.”

            If TI is dying, why has it moved from #7 (1987) to #4 (2009)? Also, Motorola hasn’t made semis in years. And if all US semis are dying, why is Intel consistently #1 by an almost 2:1 margin?

            “look at japan ex/im stat”

            But you said those Japanese statistics were manipulated.

            “There is no such thing as “fair” in the world, China certainly is aware of all the rule/banking manipulation that goes on.”

            Ah, you believe in hardball. No problem. Should the US simply declare blanket tariffs on Chinese imports? How about buying yuan with some freshly printed dollars to establish our own peg. Maybe repudiate all treasuries held by the PBoC?

            “But, go ahead, calculate the cost of opening “new iPhone” production floor in mexico as an exercise. I want to see the effect of Korea/japan/China free trade agreement vs. you importing component from those area into mexico, than paying tax in mexico and US.”

            As I already pointed out in detail, your ideas about why importing necessary components is uneconomical are nonsensical. You’re worried about the cost of shipping Flash chips from S. Korea?

            “Who is going to loan you money for opening that production line?”

            Actually US corporations are sitting on a fortune in cash – the trick is getting them to spend it. Maybe yuan revaluation tariffs would help them realize that Mexican assembly operations would be a good idea.

            “The only way the world stop manipulating USD is by global forex reform, but that entails US losing it’s reserve status.”

            Go ahead – I’ve been advocating that for years. Our vaunted reserve status is exactly how China creates an artificial advantage by buying excessive forex.

            “The game will continue since the other guys have nuclears and can easily threatened global thermonuclear game as well.”

            Are you insane even mentioning that or just completely unserious?

          2. Agere

            Alex, “Go ahead – I’ve been advocating that for years. Our vaunted reserve status is exactly how China creates an artificial advantage by buying excessive forex.”

            This what China is pushing as well but US is hardly supportive as vhiz means the days US keep printing money out of its debt will Be highly curtailed.

    2. wunsacon

      >> targeted tariffs.

      Please, let’s not give our politicians discretion over “which” products to tariff and by “how much”.

    3. alex

      S Brennan: “Currency valuation is a thermonuclear weapon compared to the wire guided missile of targeted tariffs.”

      What’s you point? If you’re concerned about thermonuclear war then China started it some time ago. Shouldn’t we try to negotiate a peace treaty and, failing that, launch a counter-attack?

      1. Raging Debate

        Alex, brilliant economic responses!

        Bear in mind it was the American leadership willing to sell America for cheap and accelerate ping-pong while it was worth far more in value. China was the next CB mandrake target.

        The 1990’s politico’s up until now have not acted in the best interest of the nation, just to themselves. They sold We the People out!

        The Chinese did what any opportunistic nation would do. We do not yet have leadership that is serving the American public. This crop is going, it will be interesting (and hopefully not too frightening) to see what comes after.

  2. bob

    More on the “communists” china that is more capitalistic than the US.

    Honda Workers Bypass ‘Toothless’ China Unions, Fueling Strikes

    http://www.businessweek.com/news/2010-06-30/honda-workers-bypass-toothless-china-unions-fueling-strikes.html

    But wait they are just going to be paying higher wages to less people, that doesn’t help their internal situation….

    China Manufacturing Slows for Second Month, PMI Shows

    http://noir.bloomberg.com/apps/news?pid=20601068&sid=aJm1BjKVIVKc

  3. Rainer Sommer

    Greetings from Vienna, Austria.
    Rainer Sommer here.
    Just as the discussion seems to repeat itself time and again, one might miss a sea-change going on right this very moment. As Bretton Woods II (Dooley, Garber,Folkerts-Landau) obviously worked quiet well in the interests of China and the USA for a decade or so, it’s – as discussed here – obviously facing some challenges in the US. But besides the mounting political pressure, what seems more imoprtant is diminishing importance of the US to China. The Peoples Bank of China states it clearly in its Q&A session (www.pbc.gov.cn/english/detail.asp?col=6400&id=1489): “China´s major trading partners now include a long and diversified list. During the period of January-May this year, trading volume with top 5 trading partners (EU, the U.S., ASEAN, Japan and China´s Hong Kong SAR) accounted for 16.3 percent, 12.9 percent, 10.1 percent, 9.4 percent and 7.5 percent respectively in China´s total trade”.

    Actually, it might soon be in Chinas interest to change its currency-regime into something like “Bretton Woods III” where China does no longer manage Yuan/Dollar but Dollar/Euro, while keeping the Yuan floating somewhere in the middle.
    So right now, as the Euro is relatively week, the “Bretton Woods III” – reaction would be to buy Euros instead of Dollars, lifting the Euro against the Dollar and having the Yuan appreciate a buit more strongly against the Dollar for a while and having Congress cheering about “the markets” finally pushing up the Yuan.

    Meanwhile China has its economy compensated by easier business in Europe, while being able to buy US-real assets at a bargain, relatively.
    When instead the Dollar gets weaker against the Euro, it might just sell Euros, or buy US-treasurie or any Stuff the US-administration begs them to buy.

    If the PBoC thinks it’s in its interest to do so, it surely has the means to manage Dollar/Euro. Besides, financing some German consumption instead of the US might not be too bad for the world economy.
    Read more here (but sorry, it’s in german): http://www.heise.de/tp/r4/artikel/32/32838/1.html

    1. alex

      China: currency manipulator to the world!

      In our current situation it would benefit the US if China pushed up the euro and pushed down the dollar, but is that really an acceptable solution? How do you think the eurozone would react? On the bright side, the eurozone might push us into helping them put a kabash on Chinese currency manipulation. Certainly US ‘leaders’ have no will to do it themselves.

  4. alex

    Yves Smith: “the US is resuming the war of words against China, and it is Obama who is now applying pressure. Before, the criticism was almost entirely at the Geithner level or below, so this relatively mild statement so close to the G20 is more significant that it appears.”

    I hope you’re right, but somehow I lack great faith in Obama translating his pretty rhetoric into action.

  5. Agere

    The question I have is :

    if deficit and trade imbalances matter for US
    , why does it spend thrillion each year on wars and military? If US decides to fight more wars and greatly increase it’s military spending each year, thus greatly aggravating the US deficit and trade imbalances, is it other countries’ responsibility to fix? How much the currencies of the other countries need to revalue in order for US deficit and trade imbalance to go away?

    1. alex

      “If US decides to fight more wars and greatly increase it’s military spending each year, thus greatly aggravating the US deficit and trade imbalances, is it other countries’ responsibility to fix?”

      Nope. So what happens when the US cuts its military spending? Do we spend that money on other government programs? If so, then it’ll have no effect on the trade balance. If not, it will simply push the US further into recession. It’s no secret that recession will reduce the trade deficit – it’s already happened. Is it your idea that the best way to further reduce the trade imbalance is to go further into recession?

      Oh, and the idea that a government deficit necessarily leads to a trade imbalance is nonsense – it completely ignores the domestic private sector. In the late 90’s we had budget surpluses and a growing trade deficit. While you’re at it, check out the last few decades in Japan for a truly dramatic example of just how absurd the “twin deficits” hypothesis is.

      “How much the currencies of the other countries need to revalue in order for US deficit and trade imbalance to go away?”

      Estimates are 30-40% against the yuan, but nobody can really be sure, so let’s try an experiment. Have China stop accumulating trillions in forex reserves, and let China float the yuan like every other major economic power floats their currency. You know, level playing field and all that.

      1. Agere

        Nope. So what happens when the US cuts its military spending? Do we spend that money on other government programs? If so, then it’ll have no effect on the trade balance. If not, it will simply push the US further into recession. It’s no secret that recession will reduce the trade deficit – it’s already happened. Is it your idea that the best way to further reduce the trade imbalance is to go further into recession?”

        I think it is incorrect to say that annual thrillion spending on wars and military does not contribute to deficits and trade imbalances. If this is not clear to you, you Could make it clearer by magnifying it by imagining US starts few more wars and spend 10 thrillions more. Is it still not clear that this 10 thrillions of war consumptions add to excess imports and aggravate very much US deficit and trade imbalances?

        “Estimates are 30-40% against the yuan”
        econbrowser show six models, 2 above 40% 2 btw 20- 40%, 1 less than 20 and 1 yuan is overvalued. All models have margin of errors that elephants could walk thru. How could one prove over or undervaluation in this manner?

  6. ray l love

    Wiki ~

    “The Plaza Accord was successful in reducing the U.S. trade deficit with Western European nations but largely failed to fulfill its primary objective of alleviating the trade deficit with Japan because this deficit was due to structural rather than monetary conditions. U.S. manufactured goods became more competitive in the exports market but were still largely unable to succeed in the Japanese domestic market due to Japan’s structural restrictions on imports.[clarification needed] The recessionary effects of the strengthened yen in Japan’s export-dependent economy created an incentive for the expansionary monetary policies that led to the Japanese asset price bubble of the late 1980s.”

    If the yuan were to rise against the dollar that would not solve the problem of weak global aggregate demand. It might help US exports in some small way but it simply shifts a shortfall from one nation to others.

    Global investment flows are not creating enough upward mobility. The concentrations of global wealth have become too protected with far too little concern for development. (Bubbles are caused by excessive investment flows that do not create increases in consumption via upward mobility)

    The global economy is simply top-heavy in much the same way that the US economy was in 1929. The poverty rate in the US, before the crash of ’29, was 71%; if the World Bank’s current standards were realistic, global poverty would currently be something similar to that in the US in ’29, if not worse.

    ‘Restoring’ the US economy to full-employment at the expense of the Chinese economy will reverse the only significant progress being made regarding global poverty. (If China’s success at eradicating poverty over the past 20 years is removed from the global equation… the global trend is negative even with the questionable standards)

    1. alex

      “If the yuan were to rise against the dollar that would not solve the problem of weak global aggregate demand. It might help US exports in some small way but it simply shifts a shortfall from one nation to others.”

      It would not just help US exports (and import substitution) in “some small way”. In the midst of a serious recession 3.5%/GDP is a very big deal.

      Right now we’re facing the odd burden of being consumer to the world. It’s been fun for a while, but as living on credit always does, it has bad after effects. Even the fun part wasn’t so fun if you lost your job to offshoring.

      “‘Restoring’ the US economy to full-employment at the expense of the Chinese economy will reverse the only significant progress being made regarding global poverty.”

      Who said it would come at China’s expense? They’ve got a mis-allocated economy just as we did when most of our “production” was building McMansions that people couldn’t afford. Let China shift to more domestic consumption – it’s not our job to prop up their house of cards.

      1. Agere

        China produces cheap goods and services in exchange for US dollar. There is no fraud here. The US prints money incessantly and overconsumes. Who is building house of cards?

  7. Siggy

    As I see it, China relies on an undervalued currency and laggard living standards that obtain from an underpaid labor force to foster exports. By following this policy China has moved from a largely agrarian society to an industrial society. With a population of 1.3 billion, China is faced with the problems of maintaining employment and improving living standards. Living standards are especially problematic.

    The only policitcal policy available to China that underwrites poltical stability is to grow the economy. You grow an economy by exporting more than you import and by saving more than you earn. That’s a Yousarian epiphany, gotta keep those wages low.

    Nonetheless, one has to admire China’s leadeship in that they are making considerable progress. What they must now embark upon is the improvement of living standards and the development of a domestic economy. To do that they are attempting to very gradually raise wages whilst concurrently inflating their money supply so as to maintain a foreign exchange arbitrage. Most assuredly, not a one trick pony here.

    To do that we see that China is scouring the world for the resources it needs to maintain its manufacturing ability and to create domestic demand. As they work their way toward an expanded domestic economy they will be the world’s greatest polluter. Perhaps they already are.

    As to things escalating, The Euro has gone cheap against the Dollar because major banks and several countries in the EU are insolvent. And the increased demand for the Dollar and US Treasuries is a flight to political stability and most assuredly not stable value.

    Concurrently we see a stock market that is now correcting down after a strong recovery. Interest rates remain artificially low due to the influence of the Fed and the relative inability of the our banks to write new loans. They can’t write the new loans because they have yet to earn enough to permit the write offs that have yet to be taken.

    Some may think that we are skating close to a double dip. I wonder if this is not unlike 1979 thru 1983 where we had two recessions, one upon the other with a barely noticeable interim of recovery. Could it be that we are still in a recession despite what appears to be data that suggests that we have entered a period of consolidation that will be the basis for the next expansion? I think so.

    Finally, this presure that is alluded to here will continue until such time as the global economy decides that it is time to create a global hard currency. While it is doubtful that the concept of fractional reserve banking will be discarded there is a very real possibility that a hard currency will be created at some point in the relatively near future.

    Now all of that will very much be at the effect of what may develop as Iran is denied access to gasoline supplies. At some point the Iranians are going to have to convince a great many people that they are not hell bent to create an atomic weapon. It may well come to be that someone will drop a bomb on the Iranian atomic facilities. What then how will the sides be chosen? What about all the radiactive trash that will floating in the atmosphere? Indeed, what then?

    Now for those of the economic analyses stripe, that’s the exogenous event that will screw everything up. So not to worry about China, worry about the Isreali’s and the Mullahs.

    1. alex

      “The only policitcal policy available to China that underwrites poltical stability is to grow the economy. You grow an economy by exporting more than you import and by saving more than you earn. That’s a Yousarian epiphany, gotta keep those wages low.”

      Correction: exporting more than you import is _a_ way to grow an economy. There are alternatives, like import substitution. It worked in the US.

      “this presure that is alluded to here will continue until such time as the global economy decides that it is time to create a global hard currency”

      What’s a global hard currency? Are you talking gold standard, bancor or something else?

    2. Raging Debate

      I like this economic analysis Siggy. Allow me to add that the political pressure in the U.S. of debt default may encourage the Chinese to release their pet North Korea.

      I believe the risk of this event is far more likely to be the flash point of world war than the M.E., despite the potential losses of several million and year of no crop growth from radiation.

  8. ray l love

    “Living standards” are improving in China at a faster pace than any place on the planet.

    The “house of cards” claims etc. are nothing more than regurgitated MSM spin that is written by those who provide what the MSM is buying. The ‘house of cards’ exists in those nations consuming more than what they are able to produce competitively. For citizens of a nation that has become dependent on a corrupt financial services sector to make disparaging remarks about nations that produce more than what they consume is… well, folly.

    As for the speculative claim of “3.5%/GDP” (alex), that claim assumes that we learned nothing from our history of trade imbalances with Japan and… that the Chinese learned nothing from that history as well. Yet the ASEAN trade zone arrangement suggests that the Chinese learned a great deal from Japan’s lack of foresight. The ASEAN trade zone represents 13% of global trade and it has the same low-base potential for growth that China had 25 years ago. The Chinese, in other words, knew better than to become dependent on US consumption in the same way that the Japanese did. The Chinese know that the US is a decadent empire.

    1. alex

      ‘“Living standards” are improving in China at a faster pace than any place on the planet.’

      Happy to hear it. Maybe they’ll improve even more if China focuses on domestic demand instead of mercantilism for its economic growth.

      ‘The “house of cards” claims etc. are nothing more than regurgitated MSM spin that is written by those who provide what the MSM is buying.’

      Ok, then (to use your phrase) “‘Restoring’ the US economy to full-employment at the expense of the Chinese economy” shouldn’t hit China too hard.

      BTW, what MSM do you follow? The only thing I ever see is how China is an unstoppable powerhouse or something.

      “The ‘house of cards’ exists in those nations consuming more than what they are able to produce competitively.”

      Look at history – the house of cards exists on both sides. Before the Great Depression the US was the world’s creditor and its big net exporter, and it got hurt worse than many of the countries it exported to and owed it money. The reason is simple. Countries that produce more than they consume get hit with lack of demand for their products when their trade ‘partners’ decide it’s time to put an end to the imbalance, and lack of demand is another name for recession. By contrast countries that had a trade deficit and decide to fix it have increased demand for their domestic production, which helps pull an economy out of recession.

      ‘As for the speculative claim of “3.5%/GDP” (alex)’

      The statistics on our current account deficit are a “speculative claim”? Do you have some more authoritative source of information? I’d love to hear it.

      “that claim assumes that we learned nothing from our history of trade imbalances with Japan”

      Apparently we’ve learned to bend over and do nothing. I’m no Reagan fan, but when our trade deficit hit 4%/GDP he finally decided to do something about currency manipulation (Plaza Accord), and that was when the economy was booming. Neither Clinton, nor Bush II, nor Obama (at least yet) has done anything of the sort, even with it hitting 6.5%/GDP a few years ago and its currently lower level being purely due to the recession.

      “the ASEAN trade zone arrangement suggests that the Chinese learned a great deal from Japan’s lack of foresight. The ASEAN trade zone represents 13% of global trade and it has the same low-base potential for growth that China had 25 years ago.”

      Credit that entirely to Chinese foresight, as I’m sure it has nothing to do with the fact that when Japan pioneered the Asian mercantilism approach the rest of Asia was far less developed than it is today.

      Regardless, it’s more good news! With a lower dependency on exports to the US, China will have less of a problem if they stop manipulating our currency.

      1. Agere

        Yuan is pegged, another word fixed against US dollar. The yuan will be manipulated only as much as US dollar is against all other currency.

  9. ray l love

    Alex,

    You have addressed most of what I said except that which matters most:”If the yuan were to rise against the dollar that would not solve the problem of weak global aggregate demand.”

    Regarding this:”‘As for the speculative claim of “3.5%/GDP” (alex)’”, I most certainly could have put that in a better way, and your interpretation of that statement is correct and understandably apt, but by “speculative” I was suggesting that it is presumptuous to assert that a lower yuan will improve the trade imbalance any more than it did with Japan in the past.

    1. ray l love

      In my previous comment I wrote “lower yuan” when I meant to say ‘higher’ yuan, or maybe I meant to say ‘higher dollar’, but something went haywire, sorry.

    2. alex

      ‘You have addressed most of what I said except that which matters most:”If the yuan were to rise against the dollar that would not solve the problem of weak global aggregate demand.”’

      I agree it’s an important problem. What I don’t agree with is the idea that the trade imbalance is only a small part of the current US problem. In addition to the actual %/GDP in trade deficit there are several knock-on effects:

      a. US stimulus “leaks” by increasing the trade deficit due to increased overall demand. I think it would be good for most countries to have fiscal stimulus but don’t think the US should bear the burden alone. Joint stimulus in many countries would be more acceptable and effective if we had more balanced trade.

      b. An improvement in the US economy will probably increase the trade deficit. It peaked at 6.5%/GDP a few years ago and has only dropped due to the recession.

      “I was suggesting that it is presumptuous to assert that a lower yuan will improve the trade imbalance any more than it did with Japan in the past.”

      But it did improve our trade balance. The Plaza Accord happened in 1985 and was an agreement amongst major countries (US, Japan, UK, Germany, etc.) to devalue the USD by having foreign central banks sell excess forex USD reserves. It worked. IIRC our current account deficit from 1985 to 1989 dropped from 3.5 or 4%/GDP to 0.5%/GDP. Some have criticized it because the US/Japan trade imbalance didn’t improve as much, but I don’t care as from the US POV what counts is our multilateral current account. Having the BoJ sell excess reserves reduced our trade deficit because the Japanese strategy (like the current Chinese strategy) keeps the USD at artificially high levels against all currencies.

      BTW our trade deficit wasn’t bad through much of the 90’s. It was the Asian crisis and the resulting currency devaluations that sent it soaring again. Then China chimed in in the 00’s.

      1. ray l love

        alex,

        You seem to be ignoring the affect that the Plaza Accords had on Japan’s economy. The ‘lost decades’ would have been much worse had the US and others not been buying Japanese goods with ‘bubble money’. And it is not only over-valued assets that have been hiding the shortfall in global AD… unsustainable debt levels in many of the OECD nations must also be considered… the current problem is far more serious and complicated than just trade and/or currency imbalances. The global shortfall in AD is in the many trillions and even if it were feasible to bring the US trade deficit down to zero that is still only a difference of a few hundred billion. That may put most Americans back to work but without foreign consumers to buy the exports produced, the only solution becomes more unsustainable debt and over-valued assets somewhere else. But in the countries where that is even doable the lessons of the recent past are leading to ‘austerity’. So where does the demand come from?

        1. alex

          “You seem to be ignoring the affect that the Plaza Accords had on Japan’s economy.”

          No, but Japan’s twin bubbles (real estate and stocks) were caused by the BoJ, which wanted domestic spending caused by the wealth effect to compensate for reduced foreign demand. Using my 20-20 hindsight, I can see it was a bad idea. Hopefully China has absorbed the lesson of what not to do when mercantilism fails, but I’m afraid I don’t see it.

          “And it is not only over-valued assets that have been hiding the shortfall in global AD… unsustainable debt levels in many of the OECD nations must also be considered… the current problem is far more serious and complicated than just trade and/or currency imbalances.”

          I agree debt levels are a big problem but I’m not sure they aren’t mostly attributable to trade imbalances and wealth distribution issues (ok, that last one’s a biggie). I just don’t know all the numbers. It seems like the countries with the big debt problems have been the net importers.

          “So where does the demand come from?”

          We could start WW3 as long as we all promise not to use nukes or even fire the conventional weapons. That’s kind of like Big Brother’s solution to excess production capacity. Doubleplusgood?

  10. JVS

    Hello Alex,
    If the yuan is truly undervalued (as seems likely) I fail to see why, in the aggregate, this harms the U.S.

    Because of the artificially low exchange rate, U.S. consumers can buy goods from China at a price lower than they would pay if they were to buy them from China at the ‘natural’ higher exchange rate. As a consequence, U.S. consumers – on average – enjoy a higher standard of living since they can buy more with the same amount of dollars (Or, if they bought the same quantity of goods as earlier, save the dollars not spent).

    There is no question that that U.S. workers in some segments of the economy are harmed – particularly unskilled laborers in manufacturing jobs – but the benefits received to the country as a whole far outweigh the losses to a selected labor market. Because of the lowered USD-RMB exchange rate, the U.S. as a whole can consume more, or consume the same and save more for the future.

    I have no doubt that it is traumatic to lose one’s job, but from an macroeconomic perspective, the U.S. as a whole is better off because of the manipulated exchange rate.

    1. alex

      “Because of the artificially low exchange rate, U.S. consumers can buy goods from China at a price lower than they would pay if they were to buy them from China at the ‘natural’ higher exchange rate.”

      By that logic China would benefit from a higher valued yuan, so why do they fight so hard to keep it undervalued?

      “As a consequence, U.S. consumers – on average – enjoy a higher standard of living since they can buy more with the same amount of dollars (Or, if they bought the same quantity of goods as earlier, save the dollars not spent).”

      That logic would hold if China had an artificially low currency _and_ didn’t run a trade surplus with the US. But a trade surplus means that China (like any other net exporter) is _loaning_ us the money to buy their inexpensive goods. Hence we can’t possibly save money this way, as it inherently means we (the US as a whole) is borrowing money. It also means we’re buying those inexpensive goods on credit, which is why I say the effect can only help the US temporarily. Nobody can live on credit forever.

      1. JVS

        Hello Alex,
        You bring up some very good points. Here’s how I see it:

        You’re right: China as a whole would benefit from a stronger RMB, because imports would be cheaper, and their citizens would enjoy a higher quality of life. But that isn’t the main concern of the government: I believe that Chinese government uses the artificially low exchange rate so that they can create an export-led economic expansion that employs as many workers as possible, in order to reduces social unrest.

        The lowered exchange rate gives Chinese-based companies the ability to manufacture goods at a low USD price. As a consequence, many companies – Chinese and foreign – take advantage of the low costs and open factories in China to export goods. These factories help to absorb the millions of poor unskilled Chinese workers that move to the cities in search of a job. Without these jobs, these workers would be dissatisfied and frustrated, and would likely take out their anger on the government.

        If the Chinese were to allow the RMB to appreciate, China would still be a less-expensive place to manufacture many goods than in U.S., but Chinese costs would rise (as the cost of labor increase in dollar terms). Higher costs means that Chinese exporters either must raise prices or lower their profit margins, but these companies have very small profit margins (I’ve read some reports that much of the export sector has a gross profit margin of less than five percent), so their only recourse would be to raise prices.

        If they were to raise prices, then U.S. consumers would buy fewer goods, according to basic supply-and-demand theory. Fewer purchased goods means fewer ordered manufactured goods, which would require fewer Chinese workers to make. This is the opposite goal of the Chinese government, which is to increase employment.

        Regarding your other comment, while I think the feedback mechanism is different than you describe, I agree with you that this cannot continue indefinitely. In order to maintain a low exchange rate, they must sell RMB and buy USD – hence the trillions of USD they hold. But those RMB go somewhere, and some stay in the Chinese economy and expand the money supply. This boosts inflation – driving up housing prices and driving up the cost of goods. Those strikers at Foxconn and Honda of China said why they were striking – their raises had not kept pace with the cost of living. It’s the Chinese who have the worst problem, and without a clear solution.

        Good stuff, these economic issues.

        1. alex

          “I believe that Chinese government uses the artificially low exchange rate so that they can create an export-led economic expansion that employs as many workers as possible, in order to reduces social unrest.”

          I agree, but the problem is that the US also needs economic expansion to overcome unemployment, and continuing to increase our foreign debt will ultimately lead to some scary instabilities.

          I’d hope that some sort of reasonable agreement could be reached so that over a fixed time table the two countries could adjust. A sudden shock is not in anyone’s interest, nor is the economic destruction of either country in anyone’s interest. Frankly from this American’s view though it doesn’t seem that the Chinese government is willing to cooperate or that the US government is sufficiently aggressive in pushing this. No good will come of that.

          1. JVS

            Yes, I’m not certain how to correct these sort of imbalances without causing some severe dislocations.

            What seems to be happening today is that many countries are trying to replace a drop in aggregate demand with increased exports. But it is not possible for every country to export more and import less, since one country’s export is another country’s import.

            I agree that to improve the quality of life of the citizens of the U.S. requires a growing economy. The way I see it, for the economy to grow means that the country produces more goods and more services. And if the economy produces more, that must mathematically mean that each person on average also produces more. To produce more per person is another way to say the workers must become more productive. That’s really the key to long-term prosperity in the U.S.

            If one accepts this reasoning, it implies that the actions of other countries make no difference in the long-run prosperity of the States. Only the increasing productivity of American workers affect their aggregate prosperity.

          2. alex

            “If one accepts this reasoning, it implies that the actions of other countries make no difference in the long-run prosperity of the States.”

            True, but as Keynes observed, in the long-run we’re all dead. The problem is that excessive indebtedness and other imbalances can blow things up in the short/medium term – long enough to bring a lot of grief to a lot of people’s lives.

      2. Agere

        There are no free lunches here for any country. Another thing, I don’t think it is responsible behavior to blame the lender( not a loanshark btw) because one borrows money to spend or consume, unless one can claim mental retard or insanity of some sort.

  11. zak822

    Doesn’t the fact that China is still ruled by the Communist Party factor into all of this somehow? I haven’t seen anything yet to indicate that the Chinese leadership has become devoted to Western capitalist principles. Or that they see any value to doing so, at least from a Communist perspective.

    It would be helpful to hear some discussion about how Communism fits into all the talk about currency revaluation and trade imbalances.

    And let’s not forget that Chinas leaders have not been afraid to imprison or simply shoot those who threaten the political stability of the regime.

  12. dr

    http://www.theglobeandmail.com/report-on-business/immelt-hits-out-at-china-obama/article1625846/

    Immelt hits out at China, Obama

    Attitudes are changing…even GE CEO Immelt is losing the love…

    “Jeffrey Immelt, General Electric’s chief executive, has launched a rare broadside against the Chinese government, which he accused of being increasingly hostile to foreign multinationals.

    He warned that the world’s largest manufacturing company was contemplating better prospects elsewhere in resource-rich countries and that those nations did not want to be “colonised” by Chinese investors.

    “I really worry about China,” Mr. Immelt told an audience of dozens of top Italian executives, referring to the Chinese government, which he accused of becoming increasingly protectionist. “I am not sure that in the end they want any of us to win, or any of us to be successful.”

  13. alex

    China is not Japan, this is not the 70s 80s or 90s, China has a cultural memory of the wests tender mercy’s, the west (primarily the US) is unaccustomed to dealing with equals, we are a waning empire.

    Skippy…have a nice glass of something and look at our imperial trophy case, with fondness, it only took 10s of millions in death to achieve, we can be proud, in our reduction.

    1. skippy

      Ha…wrong insertion of comment name.

      PS. alex with the US, it must be nice when its everyone else’s fault.

      1. alex

        “China has a cultural memory of the wests tender mercy’s”

        Oh dear, not that canard. It’s a line straight out of the Chinese victimhood catechism. How is it that that gets thrown up by someone every time China is discussed, but not when India is discussed? Not to offer any excuses for the Opium Wars, but only small parts of China were colonized by Western powers, where all of India was. So shouldn’t India have first claim on victimhood?

        And why are you talking about just Western imperialism? Want to talk about Chinese imperialism in Tibet, Vietnam and against various minorities in their empire? The Japanese invasion of China was far worse than anything the West ever did, so shouldn’t you mention Eastern Imperialism? Hey, we were allied with China against Japan, so do we get brownie points for that?

        “the west (primarily the US) is unaccustomed to dealing with equals”

        Uh huh. I’d be happy with the equality that would require the yuan to be freely convertible (like all other major currencies). Your idea of equal is a double standard in favor of China.

        “we are a waning empire”

        Yawn. Grand sweep of history and all that. Wake me in a thousand years and we’ll see how it all turned out. BTW, has Great Britain sunk beneath the waves or are they still around? Did Spain, Portugal, France and Germany survive the loss of their empires? Inquiring minds want to know.

        “it must be nice when its everyone else’s fault”

        Do you understand the difference between fault and causative factor? You sound like you’re trying to settle a dispute in a kindergarten class.

        Personally if forced to lay the fault on some party I take an American-centric POV and lay the blame on the US government for tolerating this. Not that they aren’t abetted at every turn by economists with convoluted excuses and various others indulging in the sophistry of regurgitated “historical” explanations.

        1. skippy

          Were going to be number two and then three in less than a couple of decades and yes your petulant attitude is just what they are hoping for, you make it so easy for them, the have all the time in the world, hows that vicious voting cycle doing..eh?

          Skippy…Historical hand washing is the wests game, no wonder it smacks us in the face so often aka Afghanistan…exceptionalism is such a heavy burden…we never lose..remember the fragile American psyche after Vietnam/Iran hostage…had to invade Granada to fix that[!] and still it was an epic cluster fk.

        2. Agere

          Historically in the last few thousand years, China has always remained in it’s sphere of influence even at it’s peak of power. Unlike the west, china has nog gone thousand of miles to colonist, plunder, enslave and destroy civilizations. China also never have empires that straddled continents. Btw, who started and fought the world’s only two ww in a span less than 50 years with causing tens of millions deaths…all for power, supremacy, control of resources and wealth? Who is constantly invading other people’s countries in the last few decades and military bases all over the places?

        3. Tac

          “So shouldn’t India have first claim on victimhood?” it is ridiculous to argue that one has less a right to claim victimhood if one is not the most victimized.

          “Yawn. Grand sweep of history and all that. Wake me in a thousand years and we’ll see how it all turned out. BTW, has Great Britain sunk beneath the waves or are they still around? Did Spain, Portugal, France and Germany survive the loss of their empires? Inquiring minds want to know.”

          I would be less confident than you about the west’ durability. much of the west only come out of the wintry cage of dark ages for feww hundred years which is about the length of a good dynasty. . While many other civilsations last thousand of years.

  14. count

    I believe that the way the economy is going is being kept to the rich which makes it impossible for poor people to get in on the action which is killing the economy cause lots of the poorer people have no access or are not allowed access to these resources.
    There should be a much better solution to spill the wealth into poorer areas which in the long run would help rather than making the pace of separation larger between rich and poor. Sorry for sounding simplistic but looking for a solution in a broken and problematic situation will end in severe conflicts.
    Nobody wants war especially a nuclear one. If the US needs to survive it needs to fuel more wars which basically means kill more people to keep paper money afloat. I think there has to be a more better solution than blood money. Heck why not reset everything and let the whole world be dominated by one currency. New World Order.

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