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China’s Real Choices for Growth

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Yves here. I particularly like this post because Michael Pettis takes some boundary conditions about China and works through their implications. One quibble I have is that he talks of “debt capacity limits.” That depends who the issuer is. The national government could in theory “print,” it has no need to issue debt to fund its activities. But the constraint on that sort of approach is inflation, and China is trying to cool off inflation without crimping growth too much. So China is pretty much in the conundrum Pettis describes, but for slightly more complicated reasons.

Cross posted from MacroBusiness

An exclusive excerpt from Michael Pettis’ most recent newsletter:

Last week’s news was dominated by the sudden but not wholly unexpected removal of Bo Xilai as mayor of Chongqing.

After the initial shock wore off, much of the speculation within China has moved on to what his ousting says about the evolution of power and, for economists, how it will affect the reform and rebalancing of the Chinese economy. More importantly, it seems to me that too many analysts over emphasize the intentions of the Chinese leadership when projecting China’s future. If Beijing announces that it plans to accomplish a specific goal – e.g. raise the consumption share of GDP, or double the length of railroad track – analysts quickly incorporate that goal into their projections even when it isn’t at all clear how Beijing will do it.

This failure to focus on constraints rather than intentions is why I think most analysts have gotten China wrong in the past five years. By misunderstanding how China’s growth model works, and how the functioning of the model forces certain kinds of behavior and prevents others, they have been much less skeptical about Beijing’s ability to execute its intentions than they should have been.

This is an issue not just for China, by the way, but for any country. Knowing the constraints imposed by the functioning of the balance of payments, I am wholly unimpressed by what many senior German and European leaders say they expect to happen in Europe. The fact is that if we hope to see net repayments by peripheral Europe to Germany, we will also have to see a reversal in their respective current account positions, and so far this seems unlikely. Without the latter, however, the former is impossible, no matter how determined Madrid, Rome, Berlin and Paris might be to reduce debt in an orderly way.

So no matter how sincere its intentions, what Beijing says it will do over the next few years is meaningful only if its policies are internally consistent and if they do not violate external constraints. Any decision made by Beijing that is not consistent with the economic options available is not worth taking seriously as a prediction of the future.

To try to work out what these options might be I will begin with two key assumptions.

Low GDP share of consumption

The first is that the fundamental imbalance in China is the very low GDP share of consumption. This reflects a growth model that systematically forces up the savings rate largely by repressing consumption, which it does by effectively transferring wealth from the household sector (in the form, of very low interest rates, an undervalued currency, and relatively slow wage growth) in order to subsidize and generate rapid GDP growth.

Chinese growth is driven largely by the need to keep investment levels extraordinarily high. What’s more, the very high growth rate in investment, combined with significant pricing distortions, has resulted in massive over investment and an unsustainable increase in debt. China cannot slow the growth in debt and resolve its internal economic problems without raising the consumption share of GDP.

China will rebalance

Secondly, China must and will rebalance in the coming years – its imbalances, cannot get much greater and we will soon see a reversal. There are two reasons for saying this, neither of which has to do with the claims being made by Beijing that they are indeed determined to rebalance the economy.

The first reason is the debt dynamics. Every country that has followed a consumption-repressing investment-driven growth model like China’s has ended with an unsustainable debt burden caused by wasted debt-financed investment. This has always led either to a debt crisis or to a “lost decade” of very low growth.

At some point the debt burden itself poses a limit to the continuation of the growth model and forces rebalancing towards a higher consumption share of GDP. How? When debt capacity limits are reached, investment must drop because it can no longer be funded quickly enough to generate growth. When this happens China will automatically rebalance, but through a collapse in GDP growth, which might even go negative, resulting in a rising share of consumption only because consumption does not drop as quickly as GDP.

The second reason for assuming that China will rebalance is because of external constraints. Globally, savings and investment must balance. This means that for any set of countries whose savings exceed investment, like China, there must be countries whose investment exceeds savings, like the US. To put it another way, the world can function with a group of under consuming countries only if they are balanced by a group of over consuming countries.

For the past decade the under consuming countries of central Europe and Asia, of which China was by far the most important, were balanced by over consuming countries in peripheral Europe and North America. But conditions are changing. The overconsuming countries are being forced to reduce or are working towards reducing their overconsumption.

To the extent they succeed, by definition unless there is a surge in global investment – underconsuming countries must increase their total consumption rates, or else the world economy cannot balance savings and investment. As the biggest source of global underconsumption by far, it is very hard to imagine a world that adjusts without a significant adjustment in China.

How can China rebalance?

I think my first assumption has been controversial in some quarters as recently as three years ago, but it is pretty much accepted among most economists, and it has certainly been a formal part of Beijing’s discourse. Everyone from Premier Wen and Vice Premier Li on down has insisted that the consumption imbalance has reached danger levels, and that China must and will rebalance.

My second assumption is also very plausible. In fact over the long run it is an arithmetical certainty because it can only be violated if China has unlimited borrowing capacity and if the world has unlimited appetite for rising China trade surpluses. Neither is true.

Where some analysts might disagree is in the issue of timing. China bulls continue to argue that there isn’t yet a significant overinvestment problem in China, which implies that debt is not rising at an unsustainable pace, or if it is, that it can continue rising for many more years before the debt burden itself becomes unsustainable.

This also implies that the consumption imbalance is temporary and can resolve itself gradually and over time as the benefits of earlier investment begin to emerge and eventually overwhelm the total costs of those investments. Of course if this is true China does not need a surging current account surplus because if investment isn’t being wasted it can keep investment rising faster than savings for many more years.

The key vulnerability of my argument, then, is whether or not you think investment in the aggregate is being misallocated in China and has been for many years. If you agree, then you must also agree that consumption must become a greater share of GDP over the next five to ten years. What’s more, you should also agree that the only way to increase the consumption share of GDP is to increase the household income(or wealth) share of GDP.

China, in other words, must stop transferring income from households to the state and in fact must reverse those transfers. The various ways in which this can take place can all be accounted for by one or more of the five following options:

1. Beijing can slowly reverse the transfers, for example by gradually raising real interest rates, the foreign exchange value of the currency, and wages, or by lowering income and consumption taxes.

2. Beijing can quickly reverse the transfers in the same way.

3. Beijing can directly transfer wealth from the state sector to the private sector by privatizing assets and using the proceeds directly or indirectly to boost household wealth.

4. Beijing can transfer wealth from the state sector to the private sector by absorbing private sector debt.

5. Beijing can cut investment sharply, resulting in a collapse in growth, but it can mitigate the employment impact of this collapse by hiring unemployed workers for various make-work programs and paying their salaries out of state resources.

Notice that all of these options effectively have China doing the same thing: In each case the state share of GDP is reduced and the household share is increased. There are however very big differences in how the changes are distributed among various parts of the household sector and the state sector.

Notice also that the changing share of GDP tells us little or nothing about the actual GDP growth rate, or about the growth rate either of household wealth or of state wealth. It just tells us something very important about the relative growth rates. For example we can posit a case in which GDP grows by 9% annually while household income grows by 12- 13% annually. In that case the rest of the economy would grow by roughly 5-6% annually ( household income is approximately half of GDP), and the distribution of this growth would be shared between the state sector and the business sector.

How will Beijing choose?

As I see it these are ultimately the only options – or at least the major set of options – Beijing can choose to follow over the next few years if it wants to avoid a debt crisis. Beijing could choose an intermediate path between the first and second options, and raise interest rates sharply over the next two or three years while also raising the value of the RMB by 10-15% in an overnight maxi-revaluation.

In order to protect workers from the resulting surge in unemployment, Beijing can instruct state-owned companies and local governments temporarily to hire a huge number of workers for make-work programs (the fifth option) and initially pay for this by increasing borrowing (the fourth option). At the same time it can begin a massive program of privatization, which should include transferring ownership of land to peasants, and selling off assets and using the proceeds to shore up the social safety net and to pay down debt in the banking system.

This would certainly work economically to rebalance China in a way that guarantees fairly high growth rates over the rest of the decade, but is it politically possible? Here I would defer to Minxin Pei, who might argue that the scale of privatization required is not possible politically. In that case China would end up being forced into rebalancing via the fourth option, with a long-term surge in government debt.

And this is my point. If you believe my assumptions are correct, then you should agree that China has no choice but to follow one or more of these paths. If privatization is not an option, then a collapse in the economy caused by a rapid adjustment in interest rates and the currency (the second option) might be. If that is ruled out, then perhaps the outcome will be a surge in government debt (the fourth option again), and so on.

This what I mean by the economic constraints that limit the choices Beijing can make. It doesn’t matter what anyone thinks or wants Beijing to do, if the plan violates the economic constraints, it cannot be done. To be really complete we should outline the political constraints, the environmental constraints, the demographic constraints, the external trade constraints, and so on, although of course this is way beyond my ability, but each of these exercises allows us to escape from the confusion of stated intentions and to focus on the possible.

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68 comments

  1. American Slave

    “At the same time it can begin a massive program of privatization”

    Great plan, just follow what Russia did and when wages rise the factory’s ether close down or move overseas. If they follow that plan than they will get whats coming to them, I can personally say that Russia and Poland to name a few have nothing to be proud of Ive seen it myself and China will have to raise taxes to make up for the loss of income which is why people own things like factors and stores in the first place is because they make money.

  2. American Slave

    Russia screwed over there workers they should have given ownership to the employees.

  3. American Slave

    China needs money to buy raw materials for production and a consumer society will not earn foreign currency. In that case they might as well be a total welfare state (Not that I have any problem with welfare) and just save on materials imported for anything other than export production.

  4. Hugh

    Pettis seems too grounded in neoclassical economics. As Yves points out, he does not take into account China’s fiat power over its currency. But he also doesn’t address wealth inequality and its relationship to consumption and the larger question of rebalancing. He almost gets there (but not quite) when he talks about jobs programs and wage increases, but it really depends on how such actions were carried out as to whether they would have any long term effect or change the wealth distribution (which is what is really needed).

    1. jake chase

      I agree. Mr. Pettis doesn’t seem to understand that Chinese economic reality is not connected to his chosen metrics. All those numbers are irrelevant to the goal of the Chinese state, which remains to catch up with the West in technology because technology is the only thing it lacks. Western corporations continue serving the Chinese purpose, exchanging important technology for low cost junk that produces profits immediately looted by a criminal elite. Meanwhile, China accumulates worthless dollar assets, knowing that in 10-20 years they can be always be liquidated in grain purchases or even in a giant bonfire if no other market exists for them.

      Thinking about China in the terms offered by this post is simple foolishness.

      1. Anonymous Jones

        Now *that* was insightful.

        It wouldn’t be foolish to just start spouting off about a country you clearly have no experience studying!

        It wouldn’t be foolish to just assume you know exactly what each and every one of the political leaders in this country think!

        It wouldn’t be foolish to not understand that you don’t have to repress consumption in order to undergo a technology transformation (you have indeed lived a long life in this country, right? Um, doesn’t this country develop technology without repressing consumption? How big a portion of the economy do you think technology encompasses? I mean, seriously, how daft are you?)!

        It wouldn’t be foolish to use the term “worthless” in connection with assets that will probably not be worth zero but probably just “worth less” (and in *comparison to what* is always a pretty good question, n’est-ce pas?).

        The multiple levels of stupidity in your brief comment are literally staggering. I don’t even have time to thoroughly depict how stupid it is, regardless of how brief. Spectacular! Well done! I am truly impressed!

        1. kris

          Anonymous Jones
          I agree with the intent of your post, but please refrain from anonymous personal insults. If you posted with your real identity, please go ahead, insult as much as Ms Smith allows you to.

  5. be'emet

    I don’t get any of this. MMT indicates to me that China can simply issue money and put people to work. Or monetize debts, or simply write them off and rejigger completed projects as capital assets. If more Chinese money results in devaluation, that’s what the world has been clamoring for. Or of the result brings still more productivity, the nations will find Chinese money buys actual stuff (unlike dollars?) and the more money they issue, the more valuable their money becomes – as seems to be the case already.

    The Chinese seem to understand that debt is illusory and they have learned to dodge the world banking steamroller. Why does everyone want to worry about them? If any blog should know better, surely it is this one.

    1. Yves Smith Post author

      Please go back and study MMT and sectoral balances.

      MMT has never never said the ability to monetize (print currency as opposed to issue debt) is without consequences. It’s a good policy until you run into inflation constraints. China ALREADY has an inflation problem.

      1. Heretic

        Does anyone have an analysis of the forces that are driving inflation in China? What I would like to know is what i inflation is being driven by real demand vs supply shrinkage vs supply chain inefficiencies vs financial speculation. I would be very interested if there was a focus on the food sector; a friend of mine visited China last year and said that some grocery prices in shanghai are as expensive as in the US!

        I agree with the orthodoxy that when money supply increases, prices can increase when the economy operates near capacity. But I would like a much more concrete analysis of inflation in China, then a view ‘from 200,000 ft ‘.

        1. ToivoS

          heredic, your observation on the price of groceries in Shanghai does not surprise me. I was talking with a pork retailer recently who mentioned that he was having difficulty in supplying some of the higher quality cuts because his wholesaler was selling to China. This week he was back with his usual supply, but was selling them at a much higher price.

      2. be'emet

        Sure, you’ll get your inflation if their money is created by bank loans, and released to speculators to bid up real estate and equities. If issued in a controlled manner for infrastructure, and to increase productivity (hire unemployed or underemployed, use common resources) you can only create wealth and prosperity.
        If they keep on keeping on, where’s the problem? Even if they use debt money, if they capitalize completed projects they can write off the debts.
        Inflation is the bankers’ bogeyman, favorite fantasy of Fox News.

  6. Fiver

    While Pettis is not mesmerized, as with the broad consensus of punditry who for so many years ingested the undiluted corporate globalist Kool Aid re China and see nothing but an economic giant about to eclipse the very Sun, I think he seriously understates the scale and urgency of China’s total policy dilemma:

    When the Soviet Union collapsed 2 decades ago, China confronted fundamental choices. How to attain some sense of overall parity with the US without triggering war, and how to do so within a rapidly collapsing envelope of technological capability (US makes quantum leap) and possessed, like us, of but a few very basic facts about the world – its own size relative to others and the planet, the pace of global development, the critical role of technology, and so on.

    Though the haste was entirely understandable, in my view, China made a disastrous error by buying into the ruinously destructive “God is Growth” Western model to begin with. The property, over-capacity and other financial/economic tumors are indeed serious. But as we’ve just seen, China’s leadership has created such a protracted, momentum-fed bubble in expectations it does not believe the public can tolerate a deceleration in this weed growth of even a couple percent for so much as a year. The notion that they just achieved a “soft landing” is just not tenable. They blinked that the bubbles may live for a year or two longer…

    Yet that expectations bubble (mirrored by the West’s fantasies with respect to China), is going to be burst, and very badly indeed, if China’s leadership does not slow down for real, while pivoting to face a rather more sobering reality – one we will all share if we’re smart enough to get off the current path:

    http://steadystate.org/growth-and-free-trade-brain-dead-dogmas-still-kicking-hard/

    And here’s one with apparent input from the State Department (note the “thanks to…”). Do not for 1 second think the US is not deeply into planning for its version of a very different world:

    http://www.stwr.org/imf-world-bank-trade/the-new-geography-of-trade.html

    1. aletheia33

      @ fiver, thanks for these 2 interesting links.
      assessing the timing and social-economic changes to come with peak oil etc. seems a complicated, difficult task. at the same time, common sense makes it obvious that increased dependency on local economies has to be a major result.

      at the local and practical level, planning for navigating the transiition, even if it is fully recognized as more-or-less imminent, seems to be quite difficult, in the face of the current dysfunctions and impoverishment the national/global neoliberal economic system is relentlessly imposing.

      while many forward-looking people are advocating and working on common sense preparations for the disruptions and scarcities to come, the practical realiities of the efforts to prepare before they actually occur–before one really knows what one has to deal with–seem quite difficult.

      and common sense also recognizes that the transition will be/is being heralded by a series of dire emergencies–for which, almost by definition, one cannot be adequately prepared.

      and localities may draw together as suffering people discover they would rather serve one another than the hungry monster of neoliberalism that, they now realize, ranges across the world and swings through one’s village every other day or so to pick up its tribute of flesh. but for one thing, localities are always insufficient in some areas to meet the range of human needs–hence regional economies. how are these, the next step beyond the local, really going to be met?

      common sense recognizes that the u.s. local municipality, the state government, calculating the benefits they can still get from the punitive global system versus the benefits they can provide to themselves, will not conclude that they should try to stop paying tribute to the monster until the unthinkable become the only option.

      when one depends on a national/global economy for one’s basic sustenance, it is difficult to allocate the puny resources one has, as a result of that dependency, to invest in any alternative. at a certain point, it becomes impossible without, i would think, declaring some kind of war, if only the “moral equivalent” of it. in other words, the dilemma of the third world. or in u.s. history, the outcome of the u.s. southern states’ war of secession: a century of impoverishment.

      in the great depression, some partial breaking off of states and localities seems to have occurred, which the central authorities managed to rein in. the coming emergencies may well be more dire. how long will it take for most people to realize the real causes of their misfortunes–if they ever do?

      of course it will be different in every locale, and the whole range of them really is nothing but a big “laboratory”, as many of these forward-looking people see it, but surely some of these people have made good practical models of a handful of likely scenarios.

      roughly how many models have been proposed–a few, dozens, hundreds, a thousand?–of how the transition is likely to unfold on the ground in u.s. municipalities/states as the emergencies proliferate?

      do you know of any tool that enables local planners to plug in their town’s basic social/political/economic variables to get a model of likely emergency/transition scenarios that best match their town?

      is there a database of localities that are making these kinds of preparations where one can find out what towns resembling one’s own are doing and how it is going?

      please forgive the length and incoherence of this comment, which i must either abandon or submit now. i’m just beginning to work my way into the problems at the practical level and am thinking aloud. my basic question here seems to be how far ahead of the forces of conservation, exactly, are the forces of destruction?

      1. Dan B

        While some local planners are aware of issues like climate change -Woods Hole hosted a conference on rising sea levels in Feb- only a few cities have addressed peak oil: Portland, Bloomington, San Francisco, a few others. But even there these are reports not really embraced by the politicians -who wants to go first and announce the limits to growth?. Perhaps you know of the sites Energy Bulletin, Oil Drum and a few others. Also, check out resilience circles and localization efforts, time banks, etc.

        1. aletheia33

          @dan b,
          thanks for this, yes i know of some of what you mention, am making my way into it and into involving myself locally (to the extent i can manage, given health issues, related to environmental toxicity, ironically enough).

          there is some real awareness and work going on around peak oil, limits to growth, preparing/building resiliency and the like here in vermont, and as you note, the local powers that be will not be the first to become proactive, as in some ways (which i really don’t grasp) they too seem to want single-mindedly just to keep what they think they have and, i guess, imagine they will be able to.

          speaking of which, the near universality of, shall we call it, regular folks’ and professionals’ denial alike of the present reality and likely approaching future is to me, i have to say, utterly staggering. at this juncture, you cannot even need much education for common sense to reveal to you where things are headed if you have a brain in your head.

          at any rate, i am delighted that, via your comment, i just discovered your blog, “health after oil”, and will be following it, and checking out some of the other sources you have kindly provided here and provide on your blog.

          i highly recommend this blog to nc readers.

          speaking perhaps of denial again, honestly, i have not thought much about what’s on the horizon in terms of public health challenges, aside from watching the tortured path to single payer in vermont, which one prays the big guns will not be able to derail. it’s still really touch and go on that–or perhaps, rather, now more so than ever, as the citizens’ dream is starting to look too imminent to the giant insurers.

          apologies, again, to other commenters here for OT and length of this comment.

          1. Fiver

            Just now saw your comments. Thanks for your response.

            Could not agree more with respect to the absolute refusal of the great majority of elite public opinion-makers to even acknowledge the true nature, scope and urgency of the threats we face, the basics of which have been clearly delineated for decades.

            Supranational corporate globalization, turning the planet into one enormous, integrated “system” accountable only to human balance sheets is completely insane. But so is thinking handing it over to Government somehow gives us another Earth or 2 or 3 to play with.

            China needed to modernize. It was right to go with some form of 1-child policy. It was and is quite reasonable for China to be scared of US intentions. It has made some very good moves, and some very bad ones. But there’s no way China can emulate US material standards, nor should they, as they are, as noted, Big Time Maladaptive. China’s mistake was to commit so fully to what is essentially a 20th century dead end. This is where we’re headed and it’s coming much faster than even most realists believe:

            http://www.google.ca/search?q=pacific+debris+gyre&hl=en&prmd=imvns&tbm=isch&tbo=u&source=univ&sa=X&ei=3LtuT-jDEIT00gGBvoyyBg&ved=0CDgQsAQ&biw=1067&bih=496

      2. different clue

        Groups of people here and there are trying to work on versions of this. It should be possible to read about their efforts on the web for the next several years before blackouts and brownouts make web access difficult, and before governments and giant bussiness combines work to suppress the interwebnets and make them go dark and stay dark for everyone but themselves.

        Some searchable termwords might be: John Robb Resilient Communities, Transition and also Transition Towns, Ran Prieur, Journey To Forever. For people working on the assumption that the future is a very long very hard very deep crash to a permanent new dark age; there are the various Survivalist thinkers and their pages/pamphlets/books. Kurt Saxon (Kurt Saxon’s Survival WebPages), Backwoods Home, and many other things. Also, Dmitri Orlov has been writing about how Americans can survive a crash as deep and comprehensive as the crash in which the USSR broke up. Of course he hopes it happens and some of his advice is offered in the spirit of “if only enough people will do this, they can withdraw so much support from the system that no shreds of any systems remain in existence anywhere in the former United States at any level.” But since the Kleptons are also pushing the US to that endpoint anyway, Orlov’s writings/advice on the subject are well worth reading and possibly applying by those who can.

        1. different clue

          Oh and . . . the Mormons. Everyone forgets the Mormons but we really shouldn’t. They have been working on group-resilience/group Survival for decades.

        2. Fiver

          We grew 100 crops of human beings out of oil, ballooned 5 times+, ate half the planet, and think it can be done again in half the time with the remaining half. We are as sharp as a marble.

  7. F. Beard

    The national government could in theory “print,” it has no need to issue debt to fund its activities. But the constraint on that sort of approach is inflation, and China is trying to cool off inflation without crimping growth too much. Yves Smith

    The government could simultaneously “print” and forbid the banks from doing so (credit creation) for no net change in the total money supply (reserves + credit).

    And if China wants genuine, sustainable growth it should shame the West by adapting ethical capitalism as opposed to our banker fascism.

  8. F. Beard

    Every country that has followed a consumption-repressing investment-driven growth model like China’s has ended with an unsustainable debt burden caused by wasted debt-financed investment. This has always led either to a debt crisis or to a “lost decade” of very low growth. Michael Pettis

    The problem with stealing purchasing power (via so-called “credit”) from the general population to fund investments is that one is stealing from his potential customers! This is a fundamental problem.

    1. The far Eastern

      What you stated is fundamental misunderstanding of development economics. While it is true that supressing household consumption for the sake of capital investment takes away immediate gratification, it also allows for economy of scale investment in human and capacity growth. The dilemma is finding the point where such policies are a net drain on the specific economy.

      The author of the article was extremely vague in his denunciation of consumption suppression (not that he is absolutely wrong, just that examples should have been used as it is not as clear cut as the author described.

      1. F. Beard

        While it is true that supressing household consumption for the sake of capital investment The far Eastern

        That’s a euphemism for stealing by the so-called “credit-worthy” from everyone else – “for their own good”, of course.

        takes away immediate gratification, it also allows for economy of scale investment in human and capacity growth. The far Eastern

        Common stock as a private money form is an ideal, ethical way to consolidate real capital, including and especially labor, for economies of scale without usury.

        The dilemma is finding the point where such policies are a net drain on the specific economy. The far Eastern

        Ah yes. How much theft of purchasing power is ideal?

        None? I should think so.

        The author of the article was extremely vague in his denunciation of consumption suppression (not that he is absolutely wrong, just that examples should have been used as it is not as clear cut as the author described. The far Eastern

        Real saving is suppressed too. The model is that the “credit-worthy” and the banks shall be allowed to loot everyone else for the sake of “progress” – such as it is.

        1. The far Eastern

          Ah, you’re a Libertopian! My mistake.

          I challenge you in go through the 500 years of modern capitalism to find ONE example of long term sustained economic development that WAS NOT centered around constraining personal consumption to spur domestic economic expansion.

          Here is a list of countries you can’t use (as they all used consumption suppression policies for economic development):

          USA
          England (Edwardian economic reforms)
          Russia/USSR
          China
          Belgium
          All of Scandinavia
          India
          Japan
          Republic of Korea
          Germany
          France
          Holland
          The Commonwealth States of Canada/New Zealand/Australia

          Tell you what, I’ll give you Saudi Arabia. If a nation is a despoitc kingdom with natural resources, it can develop economically without constraining consumption (and then bribing the populace)

          1. The far Eastern

            Common stock as a private money form requires no usury.

            Now you are just being silly. If you had ANY knowledge of what happened in Post-Soviet Russia, you would know that your common stock idea ended as soon as the general population needed to eat, and they traded in all of the common stock for flour and vodka. This policy lead DIRECTLY to the rise of the Oligarchs in Russia

          2. F. Beard

            Now you are just being silly. If you had ANY knowledge of what happened in Post-Soviet Russia, you would know that your common stock idea ended as soon as the general population needed to eat, and they traded in all of the common stock for flour and vodka. The far Eastern

            I also advocate a universal bailout of the entire population till ALL debt to the counterfeiting cartel, the banking system is paid off. I don’t know if the Russian people were in debt so that might not apply. In that case, a “Citizens Dividend” would have been appropriate for basic living expenses.

          3. F. Beard

            I said nothing about encouraging (or restricting) consumption. That would be an individual choice. But without negative real interest rates on their savings, I imagine people would be more inclined to save or invest and less inclined to consume.

        2. F. Beard

          Ah, you’re a Libertopian! My mistake.

          You’re liable to make many mistakes with such haste to judge.

  9. F. Beard

    5. Beijing can cut investment sharply, resulting in a collapse in growth, but it can mitigate the employment impact of this collapse by hiring unemployed workers for various make-work programs and paying their salaries out of state resources. Michael Pettis

    Common stock as a private money form allows non-exploitative and hence sustainable investment.

    As for make-work, forget that and give the population restitution for previous exploitation. Why pay people to waste their time?!

  10. F. Beard

    Beijing could choose an intermediate path between the first and second options, and raise interest rates sharply over the next two or three years Michael Pettis

    Common stock as a private money form requires no usury.

    while also raising the value of the RMB by 10-15% in an overnight maxi-revaluation. Michael Pettis

    Private currencies allow individual adjustment of their strengths. No one-size-fits-all monetary policy is required.

    1. jonboinAR

      F. Beard, you remain at the same level of specificity all the time. Do you have a website, or have you developed this common stock/ state issued money for payment of taxes theme further somewhere else? I don’t begin to understand it well enough to say yea or nay on it. For example, the poster who was arguing with you above said the Russian experiment with common stock failed. What do you say about that?

      Isn’t common stock like so many shares of Microsoft or Proctor and Gamble, or something? How can that be liquid enough to use like cash? How could one possibly evaluate some common stock someone was offering as payment with any efficiency?

      1. Stock Money Guy

        The big problem comes in when the cashier has to make change. The other day at the grocery store I asked the gal if she would take an Apple. She replied she was running low on Microsofts and did I have anything smaller?

        I said yes, I have a Gazprom, but then her eyes glazed over.

        1. F. Beard

          The big problem comes in when the cashier has to make change. Stock Money Guy

          1) The stock could be issued in 1 cent shares.

          2) The change could be in fiat and or a combination of other currencies that the customer agreed to take.

      2. F. Beard

        you remain at the same level of specificity all the time. jonboinAR

        I don’t claim to know it all and details would vary anyway. I don’t think we should seek to impose private money solutions but to allow them.

        Do you have a website, jonboinAR

        No.

        or have you developed this common stock/ state issued money for payment of taxes theme further somewhere else? jonboinAR

        Mostly here at Yves’s place but also a bit at Max Keiser’s and a bit at Mish Shedlock’s under “frlbane”.

        I don’t begin to understand it well enough to say yea or nay on it. jonboinAR

        There is little to understand. Governments don’t need banks and the private sector should have no government privileges for its money solutions such as a lender of last resort, government deposit insurance or government borrowing. And without those privileges why should anyone accept bank liabilities? Otoh, common stock is a share in ALL of the assets of a company, not a dubious, fractional claim on its liquid assets.

        For example, the poster who was arguing with you above said the Russian experiment with common stock failed. What do you say about that? jonboinAR

        I don’t know the details of the Russian experiment but I also advocate a universal bailout with full legal tender fiat till ALL private debt is paid off. That would greatly reduce wealth concentration.

        Isn’t common stock like so many shares of Microsoft or Proctor and Gamble, or something? jonboinAR

        Yes.

        How can that be liquid enough to use like cash? jonboinAR

        That’s the problem of the issuing corporations and one which they would HAVE to solve to remain competitive, I would bet, sans the counterfeiting cartel to borrow from.

        How could one possibly evaluate some common stock someone was offering as payment with any efficiency? jonboinAR

        Private ratings agencies, computers and modern communications would make that easily doable. And most people would ordinarily choose to use fiat for all debts UNLESS private monies offered true value and ease of use.

  11. Doug

    Michael Pettis writes: “The first reason is the debt dynamics. Every country that has followed a consumption-repressing investment-driven growth model like China’s has ended with an unsustainable debt burden caused by wasted debt-financed investment. This has always led either to a debt crisis or to a “lost decade” of very low growth.”

    Evidently, the same holds for those, like US/Europe/et al, who pursue aggressive growth via ‘consumption-expansion/amplification”.

  12. PDS

    The Chinese/PBOC could just “print” Yves? to avoid taking on more debt?…sure…the trillions the Fed and ECB have printed? that’s really worked out well eh?…Global CB’s have assumed political roles far beyond their original price stability mandates…..in the absence of progrowth fiscal policy here in the US, the Fed has been forced to fill the gap as the economy languishes despite the trillions policy makers have pumped in…..so now the PBOC should “print” to rebalance the Chinese economy?…money printing here in the US has become a cancer….QE, ZIRP,The Twist???…The Chinese would be wise to learn from our policy errors….not adopt them….just ask the Japanese!!

  13. Susan the other

    Economic measures to rebalance the system never cure the illness. Economics is a palliative. Shift interest rates up or down – basically that’s it. So fine. Whatever. The real question is how to cure the illness. Only healthy local economies can do that when they provide jobs and self-sufficiency. China’s attempt to stimulate consumption is a Catch-22 because they seem to have chosen one industry to focus on (maybe two if you include solar) – automobiles. The car industry. This “consumption” is going to defeat itself with high gas prices and poison air. It’s not going to solve anything.

    1. financial matters

      Similar to Indonesia where they used govt money to subsidize low gas prices instead of building mass transit systems. Now that they have to raise gas prices the system is falling apart as well as the govt…

  14. Schofield

    Cancelling or rolling over non-performing bank loans has had the effect in China of encouraging an explosion in the creation of new enterprises as well as propping up existing state enterprises. The consequence has been a great deal of competition in the marketplace for goods and services all of which has resulted in deflated rather than inflated prices. In consequence the growth in the purchasing power of wages has been exceptional whilst actual wage rises have remained moderate. In a similar way but on a much less successful manner the Western bail-out of private banks, automatic stabilizer payments for unemployment, etc. and modest stimulus packages for some countries has prevented serious economic depression. The lesson is obvious. Attention to sectoral money flows and the conscious adoption of Modern Monetary Theory to optimize those flows in an economy will be beneficial.

  15. American Slave

    What i don’t understand with China growth predictions is they still make under $5,000 GDP per capita if im not mistaken, so is that the best people think they can do? or what if they top out at $30,000 per capita GDP because I think China still has a long way to go. They are still in the process of electrifying parts of the country.

  16. ebear

    Seems to me discussions about China do more to expose the disparity and divisiveness of western political/economic thought than to offer any solution to the question of China itself. It’s laughable really. You have a motley collection of failed systems and their various proponents (I’m tempted to say “running dogs”) trying to tell China what to do when they can’t even get their own house in order!

    China has one great advantage, if she can manage to hang onto it, i.e. the ability to make decisions in the national interest. You can argue what that interest might be, or how you go about achieving it, but I don’t see that discussion happening elsewhere. Outside of China, most nations are captive to self-serving political elites tied to the global banking system. If I were a member of their Politbureau, avoiding that trap would be my first priority.

    1. Fiver

      It is not at all clear that China’s own state corporatist leadership is still capable of acting in China’s national interest – anymore than several successive US Admins have. It is very deeply engaged/enmeshed with the last 2 decades’ neoliberal globalization wreck-in-progress and its plethora of global multinational corporate operations – the ones that have been so relentlessly subverting and subsuming of the sovereign public interest everywhere else the entire time.

      They (China) made a Faustian deal they now need to unwind – as should the US with Empire. The US should’ve taken the lead in reducing mere consumption “growth” in favor of comfortable, sustainable well-being long ago, but quite clearly didn’t. If the Chinese are first to snap out of this shared global delusion of perpetual expansion, and act in their public’s interest, I am 100% supportive.

  17. kris

    Ms. Smith
    China can “print”, for sure until restricted by inflation.
    However, money = debt. Money is always debt or credit. Bank of China is in the same system. They do NOT print just money, they PRINT DEBT, like all other central banks. That’s what Michael Pettis has based his article on, IMO.

    1. F. Beard

      Money is always debt or credit. kris

      In the case of fiat simply spent into existence where is the debt? What is the issuing government’s liability?

          1. kris

            Thx. Well, let’s find out. I don’t care if I’m correct or incorrect. I just want to clarify all details of it.

            What does it mean “spent into existence”?
            Treasury issues a bond. Fed buys the bond and creates an electronic number in a computer. A bond is debt instrument.

          2. F. Beard

            What does it mean “spent into existence”? kris

            Just what I said. According to the MMT guys, the Federal Government spends first and borrows later. The borrowing is a legal requirement but logically it is not required and could be dispensed with.

          3. kris

            http://moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/
            I’ve read Warren Mosler’s book twice. He explains there how the system works. I credit him for that, I just don’t think his “solutions” work.
            As per his book, that’s how the government spends. The Fed CANNOT create money out of nothing. The Treasury can – via issuing bonds. The Fed buys these bonds and creates money. That’s why Warren Mosler advocates the merger of Treasury and Fthe Fed, which Ms. Smith disagrees with.

          4. F. Beard

            The Treasury can – via issuing bonds. kris

            Yes, the Treasuries are the true money in the system but there is no reason why interest-free fiat could not be issued instead:

            “If the Nation can issue a dollar bond it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%. Whereas the currency, the honest sort provided by the Constitution pays nobody but those who contribute in some useful way. It is absurd to say our Country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People.” from http://quotes.liberty-tree.ca/quote_blog/Thomas.Edison.Quote.6991

          5. kris

            Fine, but in the current world system, all money is issued as debt. In communism, we issued money as currency, not debt, and it didn’t end well.

      1. kris

        Fine, but in the current world system, all money is issued as debt. In communism, we issued money as currency, not debt, and it didn’t end well.

        1. F. Beard

          The debt of a monetarily sovereign nation is ITSELF a form of money but with the added expense of interest.

          Also, while a monetarily sovereign nation should be able to spend freely, its money should only be de facto legal tender for government debts, not private ones.

          1. kris

            What matters is practice. How is the current money issuing system affects trade and consumption of goods. That’s all that matters. Money is a tool for facilitate that.
            The way I see what you’re saying, is that USA issues money via private banks (Fed member banks) whereas China issues money via gov owned central bank. Ok. That’s correct. It still does not solve the issue of accrued interest that eventually eats into the real incomes of people that produce and consume real goods.

          2. F. Beard

            Government money does not require interest. Even in today’s system, the Fed refunds the interest it receives from the Treasury back to the Treasury.

          3. kris

            I like the way it’s going.
            Correct. But base money from Treasury and Fed are only a fraction of the money supply, I think right now it’s 7%. The other 93% is loans and credit cards from private banks to individuals, at quite high interest rates that is quite obvious make up quite a large portion of people’s incomes.

          4. F. Beard

            I can’t decide if all credit creation should be banned or merely all government privileges for the banks abolished.

  18. kris

    Anonymous Jones makes a great point.
    How many people in this blog (including the owner) have lived in China or in a controlled economy to have experiencial understanding of the economy?
    For those that have not, you are just theorizing.

    1. kris

      Correction:
      Unless one considers that USA and Canada are controlled economies, which is not very far from the reality, but with one major difference:
      - China has a controlled economy and a totalitarian minded society.
      - USA has an almost controlled economy, but not a totalitarian minded society……..yet.

  19. craazyman

    How can anyone understand this stuff? This guy is a professer? I’d fail his easiest class. What a blockhead I am. Thank God I’ve got Xanax but no drinking tonight. More work tomorrow. He says right up front:

    * * *

    The first is that the fundamental imbalance in China is the very low GDP share of consumption. This reflects a growth model that systematically forces up the savings rate largely by repressing consumption, which it does by effectively transferring wealth from the household sector (in the form, of very low interest rates, an undervalued currency, and relatively slow wage growth) in order to subsidize and generate rapid GDP growth.

    * * *

    Transferring wealth from the household sector? What wealth? They’re scrounging bare earth for grains of rice or building imaginary cities that look like American nervous breakdowns and what wealth and wages they do have comes from exports of junk driven by their undervalued currency. A snake biting its tail.

    They are completely crazy. And they have been since Confucious. Why did they have to come to the wild west to build railroads like slaves? And now they have to export and build cities nobody lives in and enslave each other. 130 years of what? and a communist revolution like sandwich meat in between. and now it’s back to the chain gangs and nets to catch their children falling from their skies like dead birds.

    They’d be better off in villages with bycicles if they could just get along. If they could get along, they wouldn’t need America or anyone or a weak or strong currency.

    Economics. Ha. What if they were the only people on earth? What would happen then? No currency to be weak. No where to export. How could they grow their ecomony? There’s no equation to solve that — except internal division and difference to make it all move within itself.

    So their slaves escape to wash feet and lay out dead fish on ice under flourescent lights off Canal street, corpses wondering up through glazed eyes & the women hardsouled staring blankly and men wiry with cigarettes and rough hands and buckets and boots and the persistence of animals, until they all smile when your money comes out. and their kids laughing on the corners like you and me in America. death to life.

    Can’t they all just get along over there.

    No.

    Their Dragons are everywhere in the smog and filth. You can’t take it all apart and lift it up with economic equations so it floats forward in a buoyant revelation. It thrashes and whips and rips with its claws and it won’t move, no matter what the exchange rate or anything. If they can slay their dragons, they can do anything and don’t need anything from any of us. Nor would they want anything.

    But when stands among them their dragon slayers, capable of such a transcedent metamorphosis, they will be killed dead like they killed Jesus 2000 years ago. Not for what he did, but because he light up the darkness they lived in and made them see what they are, a purification too painful to endure or pardon. Fated not to touch the earth and not to see the sun, except in Chinatown with the fish on ice under the flourescent lights and New York autumn afternoons full of sun and dreams. I’ve met a few of them and it’s stranger than any equations.

    1. different clue

      Speaking of smoke and filth, I have read lately that the smoke from coal-fired industry in China now reaches the American west coast and brings loads of mercury with it. Given that the Pacific-coastal Democrats voted to support Clinton’s MFN-For-China bill, and given that the Pacificoastal residents voted for those Free-Trade Democrats; the Pacificoastals are getting exactly the mercury they voted for.

      Our Great Lakestani Democrats who supported American economic survival against Free Trade tried to warn the bicoastal Democrats for Free Trade against American economic survival what Free Trade would lead to. But the bicoastal Democrats joined the Republicans in supporting Free Trade against America . . . just like the Economic Traitor President Clinton wanted them to do. And now . . here we are.

  20. Michael Pettis

    Yyes, the part quoted above represented only a part of the full argument in the newsletter. If you want to receive my newsletter regularly, please let me know at the email address which I used to sign in to this comment

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