MIchael Pettis on the High Odds of Trade War

Beijing-based fiance professor and commentator Michael Pettis gives a typically sobering outlook in a Financial Times comment today, seeing the seemingly irresistible force of trade surplus countries’ resistance to shifting towards more internal generated demand colliding with the immovable object of trade deficit countries’ inability to tolerate the high unemployment rates that result for a prolonged period.

There are some interesting elements of his presentation. First, although he thinks a trade war is a bad outcome, he also see the odds as low that the trade surplus countries will take the steps needed to rebalance their economies. That brings us to the second point, Pettis, without invoking the word mercantilist, sees the trade surplus countries as taking overly aggressive measures to preserve their positions. This may sit poorly with some readers, who tend to see trade surplus/high savings countries as virtuous, and the trade deficit/debtor nations as wastrels. But the existence of surplus countries requires debtor nations. Deriding the debtors while praising the surplus nations is like saying you thinks sex is sinful but consider babies to be a blessing. Unless you believe in storks as the mechanism for procreation, that position can’t be reconciled.

Pettis gives a useful bill of particulars: even though China has moves to liberalize its currency further (a measure we derided as a headfake), its small steps have been more than offset by continued extension of cheap credit to domestic companies, with the result that they are even more competitive, thanks to continued government intervention, than before. The recent and likely continued fall of the euro has been a boon to Germany. Japan has, relatively speaking, been a good sport, allowing its yen to rise, but it appears to be on the verge of intervening.

Pettis sees these imbalance worsening until they become intolerable, and he anticipates that the US Congress will (as in the 1930s) act as the heavy. But from his vantage, the proximate cause of a trade war, US retaliation, would not be the underlying cause, which is surplus countries pushing an unsustainable arrangement to its breaking point. But in a perverse way, this is understandable, since in past financial crises, the surplus countries have found adjustment much more painful than the debtor nations. But trying to forestall the inevitable may make the eventual dislocations even more severe.

From the Financial Times:

After jumping to $42bn in May, the US trade deficit rose to $50bn in June, a number not seen since the summer of 2008 and never before mid-2004. As it continues rising there will be renewed criticism about US consumers embarking on another ill-judged buying spree, but this time the finger-waggers will be wrong. The surge in the trade deficit is the automatic consequence of a shift in global trade imbalances.

Five countries or regions have largely driven these imbalances in the past decade. Three of them – China, Germany and Japan – run huge trade surpluses on which they are dependent for domestic employment growth.

Counterbalancing them have been the two trade-deficit champions – the US and trade-deficit Europe, dominated by Spain, Italy and Greece.

The financial crisis has undermined the precarious decade-long equilibrium between these blocs by forcing trade-deficit countries to reduce debt, especially household debt. As they do, the excess demand they provide to the rest of the world must decline. Trade-surplus countries, which depend heavily on this demand to absorb their excess capacity, have resisted this adjustment fiercely by trying to maintain or even increase their surpluses.

They are succeeding. The combination of a collapsing euro and German fiscal constraint will raise Germany’s trade surplus sharply and generate rapid growth. Any rise in the value of the renminbi has been more than offset by a surge in cheap credit to Chinese manufacturers, increasing their competitiveness, so China’s surplus is also rising. Recent strength in the yen has set off alarm bells and Tokyo, too, will do what it can to maintain its trade surplus…

But global trade must balance. The rest of the world will have to absorb, with rising trade deficits, the combination of rising surpluses among surplus champions and declining deficits in trade-deficit Europe. Given its openness and financial flexibility, the US will, in practice, absorb most of the adjustment, its trade deficit rising inexorably – until Congress implements vigorous anti-trade policies. The US lacks the industrial, currency intervention and interest-rate management policies available to the main trade-surplus countries, and so will be forced to use other forms of trade protection – tariffs and import quotas.

This should not be allowed to happen….It is up to the surplus countries to ensure their urgent dependence on foreign demand does not result in a collapse in the willingness of deficit countries to continue providing that demand…

Trying to avoid sharing the cost of the necessary global adjustment is how the major economies reacted in the 1930s, and those policies are widely and correctly referred to as beggar-thy-neighbour. We know how that game ends.

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  1. Ivan Karamazov

    I’m a longtime reader of Pettis’s blog. A quote from him on the issue of debtor/surplus culpability comes to mind here: “…let me suggest that if you know beyond any doubt the direction of causality here, then you probably do not understand the problem.”

    1. Yves Smith Post author

      I think these are different issues. The Pettis quote you cite seems to be about the genesis of the problem. But he is saying in his FT piece that the debtor nations don’t want to take on more debt (and unemployment) and the surplus nations are refusing to adjust.

      1. Bates

        @ Yves… “the surplus nations are refusing to adjust.”

        Can you please point out an example of when a surplus nation, or nations, made an adjustment that rebalanced world trade and all lived happily ever after? Thank you.

        The US Gov/Treasury acts as if the current imbalance between debtor and creditor nation’s trade is a complete surprise. It is not. Triffin, in the 1960s, pointed out what would happen when a single country issued a currency that was both the world reserve currency and the internal currency of the issuer. Keynes understood that a single currency acting as an internal currency and at the same time world reserve currency would not work…So, Keynes proposed the Bancor which would act in a similar manner as the current IMF special drawing right or SDR… It’s anyone’s guess about how Keynes plan would have worked but we now know for certain that Triffin was right.

        “Triffin pointed out what would happen when he state his ‘paradox’; ie, “The Triffin dilemma (less commonly the Triffin paradox) is the observation that when a national currency also serves as an international reserve currency (as the US dollar does today), there are fundamental conflicts of interest between short-term domestic and long-term international economic objectives. This dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s, who pointed out that the country issuing the global reserve currency must be willing to run large trade deficits in order to supply the world with enough of its currency to fulfill world demand for foreign exchange reserves.

        The use of a national currency as global reserve currency leads to a tension between national monetary policy and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account: some goals require an overall flow of dollars out of the United States, while others require an overall flow of dollars in to the United States. Currency inflows and outflows of equal magnitudes cannot both happen at once.”

        see Wiki for complete entry regarding Triffins Paradox and it’s implications… http://en.wikipedia.org/wiki/Triffin_dilemma

        1. Tom Crowl

          This idea of an International Reserve currency being distinct from a national currency used internally by a nation makes a lot of sense to me!

          I can see how having them unified could introduce complications, confusions and distort incentives, relationships and values.

          I’m not sure how that affects the Trade War question… since while I don’t favor economic isolationism… I do favor a greater degree of resiliency by reducing dependence on distant sources for critical necessities…

          (Like the foolish de-ruralization of Haiti or persuading African farmers to grow ‘cash-crops’ instead of the necessities of life…

          All part of a short-sighted, centralized, globally ‘financialized’ paradigm…

          That sees people as a means for a more prosperous financial sector…

          Rather than the other way around.

          1. Bates

            Tom… “I’m not sure how that affects the Trade War question… since while I don’t favor economic isolationism… I do favor a greater degree of resiliency by reducing dependence on distant sources for critical necessities…”

            As long as any national currency acts as the world reserve currency there will be guaranteed imbalances in international trade…especially if the world reserve currency can be printed as a fiat currency with no commodity backing. The imbalances eventually lead to trade disputes.

            I see no simple solution to dependency on foreign trade for various commodities that are necessary for any modern economy. Finished products are another matter.

  2. /L

    In general I agree with the analysis of the core of the problem. But this line is to often said as self evident:

    Three of them – China, Germany and Japan – run huge trade surpluses on which they are dependent for domestic employment growth.

    It is a text book / model assumption, I believe. China probably correct, Japan I don’t know, Germany is the historical export champion and is an advanced export industry. Germany has since long have had high unemployment despite being an export champion.

    Sweden is also in this group, albeit a small country with only 9 million people it beats them all in per capita measure, export and surplus. Sweden and Germany is in many instances similar as export nations. Historic productivity growth is over all good and fewer and fewer workers produce more and more, despite constant export growth number of people working in export industry is declining.

    They are not dependent on export for employment, employment is suffering because of deliberate policies to squeeze domestic growth and employment to achieve export surplus. The export industry interests is the mightiest special interest, it’s economic propaganda dominates the economic debate, they own the economists of any significance. Domestic austerity policies to achieve export surplus create unnecessary high unemployment not the other way around.

    Modern developed export industry is no longer as in the 1950s when it did need a much larger work force that did cause industry wealth to spread in the nation. The cost of labor in industry products today is low. Import content in export is high in modern industry. In Sweden the export sector is the largest importer, a significant fall in export due to the global crisis did almost not touch the relative export surplus. The significance of moderate shifts in labor cost and currencies exchange rates is overrated. A modern export industry country doesn’t work like a raw material exporting developing nation.

    It’s time for economic text books to update their models.

    Suffocating Europe
    Jürg Bibow
    The real irony in this German tragedy is that German beggar-thy-neighbor policies have effectively forced a fiscal union upon Europe. Or, rather, if not a fiscal union, a general default it will be. The point is that Germany’s notorious trade surpluses vis-à-vis its European partners must by necessity have a financial counterpart. In one way or another, German banks financed the country’s export successes by lending to today’s crisis countries. They did so as willing borrowers were hard to come by at home when the country – duped by its own political leadership and powerful export lobby – prescribed itself a decade of belt-tightening, flat real wages, and flat consumption growth, that is. Public celebration of repeated wins of the world export championship title made the duped Germans even feel good about it.

    The special “export dependence” is trumpeted constantly by the interests of export industry. It’s ridiculous, nighters Germany or Sweden is more export dependent than anyone else, in general. If you can’t print a global reserve currency it’s in general wise to pay your import with export. The general dependency in export is to pay the imports you want, no more no less. Is Sweden or Germany of a special case compared to other developed nations, does they have an extra large need for imports? No not at all probably rather the opposite.

    It’s not by any special need they conduct a permanent austerity on its domestic market, it’s by free will they conduct beggar-thy-neighbor policies. Albeit the people are fooled to believe it’s necessary.

  3. Daniel

    why does he keep on saying that the euro “collapsed”? The euro didn’t collapse at all, it fell back to its fair value (PPP is 1,17) and then went back to overvaluation.

  4. Sundog

    I know he’s having fun, god bless him, but could someone collar Pettis for a month or two and force him to write an economic history of the cold war?

  5. leroguetradeur

    “Trying to avoid sharing the cost of the necessary global adjustment is how the major economies reacted in the 1930s, and those policies are widely and correctly referred to as beggar-thy-neighbour. We know how that game ends.”

    The implication is incorrect. It is part of the myth of the origin of the Depression that it was caused by tariff restrictions, Snoot Hawley, but it cannot have been – US imports as a percent of GDP were tiny. Today is a bit different, they are much bigger.

    The crash was not caused by rising tariffs, and what turned the crash into the Depression was the identical policies of Hoover and the early Roosevelt administrations.

    1. vlade

      I believe there were two counterplays in this:
      – first, the imports were minuscule to start with, but as would RoW move from gold standard, the imports would get cheaper and might have risen. We will never know.
      – what we will know is that the tarrifs started a wave of protectionism around the world, which had impact on US exports.

      US today is not US in 1930, and import tarrifs on US today will have impact on China (and thus indirectly on Europe, with the Germany(machinery, or machinery to build machinery)->China(goods)->US chain (consumer) chain).

    2. Jim Haygood

      More likely, what turned the Crash into the Depression was the Bubble preceeding it … plus the unopposed liquidation of banks.

  6. purple

    The reason the US is running trade deficits is because it cannot devalue the dollar to a level of equilibrium with its global competitiveness in production/manufacturing. This is because of dollar reserve currency, which Wall Street likes just fine. But the US is no longer decisively competitive enough in world trade to support a financial (or military) empire and this is inevitably going to cause a collapse in the post WW2 order.

    That order has already been undermined by unofficial IMF expulsion from Asia and the stalemate in Doha, after the US found it couldn’t just bully everyone.

    A tariffs policy by the US would just be an open admission it can no longer handle/afford its task as global regulator and it would hasten the end of US superpower status.

    I’m afraid far too many Americans – most especially in the Ivy league meritocratic class- remain blind to just how far the US fallen; it’s not 1947, 1970 or even 1997 and it never will be again. What comes afterwards is an open question.

  7. Delicious Pundit

    Deriding the debtors while praising the surplus nations is like saying you think sex is sinful but consider babies to be a blessing

    My years in Catholic school are flashing before my eyes….

  8. kaan

    The putative surpluses are reflection of Ponzi Scheme in AngloLand. Credit creation process creates debt out of thin air and this will eventually find its way to a producer in exportland.
    Why so-called surpluses suddenly disappeared in 2008?
    Is it just a coincidence as soon as Ponzi Scheme unravelled,
    surplus evaporated?

  9. Tao Jonesing

    As somebody who earns a living off being a strategist, one of the things that I’ve been concerned about for years now is how our continually increasing dependence on foreign manufacturing leaves us open to losing a trade war before it ever starts.

    In 2001, when I was at Intel, the FTC released a report about international imbalances in semiconductor manufacturing. The report was rather alarming on a number of levels, but the U.S. semiconductor industry continued to increase its reliance on Taiwanese (and ultimately Chinese, as it turns out) foundries.

    Whatever one thinks about the Bretton Woods agreement, the advantages that accrued to the U.S. came about because the U.S. representative bargained on behalf of the country and its people. After thirty years of U.S. representatives negotiating away U.S. capabilities to provide advantages to multinational corporations, I’m not sure that we have anybody on the front lines who will understand how to deal with a trade war.

    According to Hayek, when your government owns your country’s means of production, you live under a socialist regime.

    According to Hayek’s disciples, when another government owns your country’s means of production, that’s free trade, and all is good.

    Unless, of course, the country that owns your means of production decides to stop producing for you.

  10. vlade

    A really nice metaphor :). When I was trying to explain a few months ago (not here) that putting the blame on the borrower only is dumb, I got a lot of flak.

    Unfortunately, from a historical perspective we tend to look at lending as the good thing (or rather saving. I guess it makes sense from evolutionary standpoint), and it’s very hard to make people spot that borrowing doesn’t happen in a vacuum, and if people want to save (and make money on the saving), someone HAS TO borrow. Not to mention that ultimately, it’s the lender who selects who gets the money, and there’s no natural law which says that money lent will be repaid.

    1. DownSouth

      “…there’s no natural law which says that money lent will be repaid”

      Creditor countries maintain armies to enforce payment. Free trade and free markets are not free at all. Coercion (violence or the threat of violence) is usually necessary to force recalcitrant debtor populations to pay.

      However, it seems to be the fate of all empires, whether traditional (territorial colonization) or neocolonial (financial colonization), that enforcement (military) costs eventually grow to exeed what can be squeezed out of the subject races. The empire then flips from being a creditor to a debtor.

      Once this occurs, has any great empire (for instance, those that have existed during the past 500 years—-Portuguese, Spanish, Dutch, English) ever been able to recover?

    2. Jim Haygood

      Down South, I would nominate this as the overwhelming threat to the US economy — the excess 4% of GDP spent on an empire that doesn’t pay for itself.

      Sixty-five years of militarist ‘transactions of decline’ have slashed the US share from half to a quarter of global GDP. Thanks to the idiotic, sinister GWOT, the next halving in global market share should take only 50 years.

      Where are the macroeconomists who grasp this issue, and are free to speak? Michael Hudson? Anybody?

      1. charcad

        the excess 4% of GDP spent on an empire that doesn’t pay for itself.

        This is only true if one views a so-called “USA” as the core of the empire. But if the USA is simply another – albeit very important – province from which resource is extracted by the Imperial rulers, then this objection doesn’t apply.

        The iron rule of all empires is a net flow of resources from the provinces to the capital.

  11. Daniel de Paris

    This may sit poorly with some readers, who tend to see trade surplus/high savings countries as virtuous, and the trade deficit/debtor nations as wastrels. But the existence of surplus countries requires debtor nations.

    This is current nonsense. Certainly politically correct. But no one requires a world in which debtor nations just plainly depend on others for basic subsistence. And cannot pay it back.

    No one requires a world in which debtor nations will just default on their commitments. When you get to a point where you cannot pay back you do not emit Treasury bonds on international markets and later decry those countries buying your very own instruments. Hypocrisy. Stop emitting those. Full stop.

    Passing the point of no-return – we are quietly getting there – is both foolhardy and destructive of currency systems first and nations later.

    Deriding the debtors while praising the surplus nations is like saying you thinks sex is sinful but consider babies to be a blessing.

    Utter nonsense. The comparison is basically inadequate, bound to moral judgements and unrelated to the issue.

    To some extent only by the way. Since a nation with no children – and more so with highly disrupted long-term financial balances – is not exactly preparing for times to come. Does anyone need a list of those as well? Politically-incorrect, parochial and bourgeois? For sure!

    1. DownSouth

      “The comparison is basically inadequate, bound to moral judgements and unrelated to the issue.”

      Talk about the pot calling the kettle black.

  12. Skippy

    How much of the global financial market is electron leveraged asset bubble rubbish…eh.

    How many powers above its natural weight have WE added to it out side its natural state.

    How many levels of complexity (RISK) have WE created out of thin air for the only purpose of defying natural constraints aka Malthus.

    How much hubris must the human race subject its self too before enlightenment, we live in a finite world, human potential stripped like an abortion (I wanted a boy) and for what..todays profit.

  13. ds

    I see a low risk of a trade war. As bad as it is for manufacturing, in America the consumer rules and the consumer wants low prices which they know can only come from the Chinese products sold in Wal-Marts all across the country. The political base of support for widespread trade restrictions against China just isn’t there.

    In the end the Federal Government needs to take more responsibility with respect to fiscal policy. If leakages due to imports are dragging upon demand and employment growth more than before, then fiscal stimulus needs to be stronger than it was before. I don’t see the worry about trade imbalances when we are talking about fiat currencies.

    Ultimately these “imbalances” are ledger entries. China does not care about the value of its account balances with the US as much as they care about keeping its economy as close to full output and employment as possible. For whatever reason, they have decided that this is only possible through export-oriented growth. The priorities here in the US, however, seem to focus more on imbalances, deficits, and currency value, rather than the real economy where so many millions of people are hurting.

    1. charcad

      I see a low risk of a trade war. As bad as it is for manufacturing, in America the consumer rules

      The consumer doesn’t rule. But the elites who now rule the USA rose to power on the current policies. I have yet to hear anyone offer a coherent explanation of why they’d want to reverse themselves on policies that have served them so well.

      It’s become routine that beginning in the Augusts of even numbered years certain policy issues come up for brief public discussion in the privately owned and operated mass media. Those shepherding Democratic opinion will start wringing their hands over the disappearance of industrial jobs. Similarly, paid gas bags like Limbaugh begin talking about immigration and codified anti-white male racial discrimination.

      It’s all as predictable as lunar eclipses. It’s just role playing like Dungeons and Dragons or Second Life. And it will all be forgotten immediately after election day.

    1. MyLessThanPrimeBeef

      Give me something that might interest me if you want my stuff.

      No one owes anyone anything.

  14. Yearning to Learn

    I hate to tell you all this, but we’ve been in a trade war for a long time. The US population just didn’t know it.

    I submit that there is no practical difference between a hard peg and a tariff.

    Once the US population figures that out then we might start fighting back in the war that’s been going on a very long time. who knows how we’ll fight back, but we clearly will.

    1. charcad

      I hate to tell you all this, but we’ve been in a trade war for a long time.

      Sure we have. And New York City & Washington are allied with Beijing against Middle America.

  15. Neil D

    I thought it was OK for America to run trade deficits. We’re the worlds bankers and investors. We profit from our brilliance at designing and innovating and leave the dirty details of manufacturing and resource extraction to others. Isn’t that what moving up the value chain is all about? Those who used to work in manufacturing can work in retail and health care.

  16. billwilson

    Glad to see you following Pettis. He has consistently been a very readable and fair analyser of the current economic situation. His links/life within China give him a perspective that many in the West do not have.

  17. Siggy

    In a trade war all parties lose. In a shooting war, all parties lose. For the winners, what they gain is essentially an empty bag.

    Autarky is a pipe dream and the world has been interconnected for a very long time. It’s just that we’ve shortened communication and transport times. Is there an increasing probability that we may well fall into a trade war? I believe the answer is yes. Is the probability very high? I don’t know, on the other hand I do know that we are at the effect of a mercantilist policy that is being underatken by China as a part of their search for a political economy that mainatains order and sustenance for a population of 1.3 billion.

    Being at the effect of a mercantilist policy is in itself a form of a trade war. How do you defeat a mercantilist, just don’t buy their stuff.

    Consider the 10% or so currently counted as being unemployed. It might take five years but we could create jobs by going back to assembly plants and the like. There is tons of stuff that we import that could be made here.

    The problem with that is that the wages will be incredibly low. So, now the problem becomes clearer, how do we balance the living standards in China with those in the US? Ship them lots of free TV’s and pollute their culture with our special brand of consumerism. Force them to inflate their currency.

  18. Jim Haygood

    ‘The US lacks the industrial, currency intervention and interest-rate management policies available to the main trade-surplus countries.’

    Industrial policy, yes. As for currency intervention, the mechanism exists — the Treasury’s ESF and the New York Fed share the interventions 50/50, with Treasury acting as the lead agency. Together they hold a negligible $50 billion in euros and yen. Compare this to China’s $2.5 trillion in international reserves — DOH!

    Their last intervention was in Sep. 2000, to prevent the euro falling below 85 cents. It worked, as the euro’s stronger level of today confirms.

    If a deflationary dip occurs, with fiscal policy tightening and monetary policy immobilized at the zero bound, they may be obliged to intervene again. I’ve prepared a paper outlining how they should proceed.

  19. charcad

    I think Pettis is over reacting. A trade war would require a contemporary US Government that actually gave two hutes about the American population overall. There is less evidence for such an entity than there is for UFOs being alien spacecraft.

    Pettis has clearly been in Beijing far too long. He’s now engaged in motive projectionism. He’s assuming the regime in Washington DC will take action in American nationals’ interests like the Beijing government sometimes does for the Chinese population.

  20. DownSouth

    Pettis said: “The US lacks the industrial…policies available to the main trade-surplus countries…”

    According to Miguel Teubal, writing in Rise and Collapse of Neoliberalism in Argentina, the decimation of Argentina’s industrial policy was quite deliberate:

    In the early 1970s Argentina was one of the highest income per capita and most industrialized countries of Latin America. It also had one of the more advanced scientific-technologic infrastructures, for example, its electronics industry at the time was said to be on the par with that of South Korea. In this context a more export-led industrialization strategy was in the making, something that
    appeared to be similar to what was occurring with the NICs of Asia. It was thought that such a strategy could be much more employment-generating than the traditional strategies based on the export of primary goods – agriculture and livestock commodities and petroleum. Nevertheless, this strategy was soon set aside. Since the mid-1970s an important role was assigned to foreign indebtedness and to local and international financial interests, a strategy that increasingly diverged from the industrial exports strategy concocted in the early years of the decade. Why was this strategy adopted? Apparently a growth policy that
    implied increasing industrialization would have favored a national bourgeoisie and its alliance with labor, something that could have been confrontational with the traditional alliance of agrarian oligarchic interests with foreign capital(Minsburg, 1987; Teubal, 1993).

    1. Jim Haygood

      Argentina is still quite self-sufficient in manufactures. Nearly everything you see in retail stores — hardware, shoes, clothes, appliances — is locally made.

      Unfortunately, little of it is internationally competitive. The quality is questionable, the technology not leading edge.

      Whether Argentina’s attempted industrialization was sabotaged by the troglodyte agrarians, or by the inflationary populism of the Peronists, is hard to say.

      For now, Chinese imports are held at bay, and local manufacturers protected (even from neighbors in Mercosur) by a managed weak currency.

  21. Jim the Skeptic

    The Great Depression in the U.S. was not caused by imports or trade wars. Using Smoot Hawley to explain the depression in the U. S. is nothing but disinformation.

    First, the banks got themselves into trouble. Excessive risky lending seems the best explanation but the cause is irrelevent. (Google “1920s” and “debt”)

    Second, Bank deposits were not insured and when the trouble began there were runs on the banks. Banks went out of business. Ordinary citizens lost their money deposited in the banks, some of them would never trust banks again.

    Third, as a result it became difficult to get credit, so spending was reduced. Unemployment soared as demand slackened.

    Fourth, fear of unemployment meant that even the employed did not trust the system. They reduced their spending.

    Once trust is gone, it is very difficult to restore it. (Fool me once, shame on you; fool me twice shame on me!)

    We won’t have a trade war if the world’s net exporters adjust. If they don’t act then we have no choice but to act. We can not get balanced trade immediately but we should demand large steps in that direction. We don’t have years to play around with the solution.

    1. tc

      The immediate steps the US could take is to stop the wars in afghan and Iraq and cut back on military budget(around 800b annually). Imagine what this vould do to deficits (trade or debts) yearly

      1. Jim the Skeptic

        “The immediate steps the US could take is to stop the wars in afghan and Iraq and cut back on military budget(around 800b annually). Imagine what this vould do to deficits (trade or debts) yearly”

        No, U.S. importers will be thrown under the bus first. Wishful thinking will get you no where!

  22. sherparick

    “Deriding the debtors while praising the surplus nations is like saying you thinks sex is sinful but consider babies to be a blessing.”

    Gee, the mainstream Christian Churches have managed to maintain this cognitive disorder for close to 2,000 years. I am sure the high priests of neo-classical economics and their acolytes can do it for a few decades at least.

  23. Ignacio

    I think that Pettis omits something about Germany. German exports not only benefited from lower euro exchange rates. Similarly to chinese authorities, german authorities used fiscal policy subsidizing labour to promote exports. Not exactly the same but with similar results.

  24. charles

    Michael Pettis curiously does not refer to the Chinese restricting to 40% the exports of ‘precious material’ used
    in many ‘electronic gadgets’assembled there, i.e Apple’s, the Chinese ‘twis’ for many headaches to come. As for the
    trade war, the presence of the U.S Navy off the Chinese coasts, does little in the way of the all-important Chinese
    ‘guan-xhi'( pardon my Mandarin )

    W.Münchau just wrote a piece about ‘global imbalances’, not sparing Germany, and his view is that the surpluses lead to imbalanced financial streams, i.e Commodities and emerging markets, thus an ‘imbalance’multiplier


  25. tc

    It seems no one considers the contribution of war expenses and military budgets which as I know now stand at above 800b annually. If the US further increases this type of expenditure say by 10 folds, I don’t see how the world could balance trade with US except by doing the same.

  26. tc

    “Deriding the debtors while praising the surplus nations is like saying you thinks sex is sinful but consider babies to be a blessing.”

    I do not think this analogy valid. If a normal person borrows and spends beyond one’s means, one should not blame the creditor. In US case, it is obvious that the wars and military budget which US can claim top spot(US military budget annually is bigger than the next 30 biggest budgets combined of other countries.

    1. /L

      Why should those who are in the business of investing in making credits be specially treated? Anyone else making an bad investment isn’t given a free pass. The whole financial crisis is ripe with bad judgments by those making loans.

      The US having an military budget that is about 47% of the global, but on the other hand the military budget is only 4,7% of US GDP. The US is encompassing the entire globe with its military machine, diplomatically, financially no empire/hegemonic have ever been eve close to something like this. The sun did never set in the British Empire but compared to US they were small peddlers in the empire/hegemonic business and their potential competitors were relatively much stronger militarily. 4,7% of GDP in the empire business is probably empire on a shoe string budget.

      If US have high unemployment and poor domestic economy it’s an internal affair how US is organizing its society. It probably have very little to do with 4,7 % spent on the military and nothing to do with China or anyone else who by some peculiar reason like to amass US T-bonds in exchange of real gods and services. US operates globally in its own fiat currency, US can always pay. It’s not like that there is an global enforcement officer who will come and knock on US door and seizure it’s property. There is only one ultimate global enforcement officer and that is USA.

      Theoretically and by international “law” China could “seizure” US property in China by using it’s US dollars and buy for the book value. But China isn’t even close to pull of something like that (yet). de Gaulle threatened to do that when the previous US dollar pyramid game was to collapse, it didn’t happen. There were huge amounts of dollars amassed in the European central banks, they did disappear in no time when the oil price exploded.

      Like a coincidence, there was an Arabic oil summit in Alger June 2 1972, Nixons energy adviser James Akins (later ambassador in Saudi Arabia) attended and made the claim that some OPEC countries planed to double the oil price. The Arab oil experts were stunned they haven’t heard anything about such a move. Then there come official American prognoses speculating in rising oil prices. The American journalist Jack Anderson claimed he did have sources inside ARAMCO that had access to secret documents that said they did push Saudi Arabia to raise its tax on oil.

  27. tc

    soory…have to repost

    “Deriding the debtors while praising the surplus nations is like saying you thinks sex is sinful but consider babies to be a blessing.”

    I do not think this analogy valid. If a normal person borrows and spends beyond one’s means, one should not blame the creditor. In US case, it is obvious that the wars and military budget which US can claim top spot(US military budget annually is bigger than the next 30 biggest budgets combined of other countries) should not be blamed on any creditors, unless you could claim that it is cheap credit that tempts or causes US to indulge in wars.

  28. Hugh

    In the absence of meaningful international leadership by the US, the only country that could attempt such leadership, every country/region is going to be running their game, doing what is best for themselves. Everyone will become more protectionist. Exporters will be more protectionist and mercantilist.

    I am reminded of the paradox of thrift where what makes sense on an individual basis can be devastatingly destructive in the aggregate. That is what I think we are seeing.

  29. Samuel Morales Jr.

    Why does it have to start with the surplus nation? It should start here. The increased trade deficit is result of spending. The stimulus is meant to stimulate spending. Chinese are capable of consuming their own products if it wasn’t for the dollar-peg, and at the same time the USA doesn’t need to spend all this money. The point of a export economy is not just to create “work” so you can feed somebody else. Consumption is the reward of production, and the Chinese are basically like slave-labor to the Americans. Sorry to put it that way. I already said many times, savings is the key. To say that somehow that export economies are the sole blame for the global economic imbalance is wrong. Chinese save their money, Americans go into debt. The savings goes into production. Chinese savings dwarfs that of the American, and American debt vice-versa. The USA can’t risk a trade war, because it simply doesn’t produce enough to meet it’s own consumption demands. USA doesn’t need to send the world IOUs, and auction off treasuries, but it still does. Barack Obama actually addressed this with China, but his actual policies is just the same old direction. His policies are trying to exacerbate the problem. Chinese can’t spend and save at the same time in the same volume.

  30. Psychoanalystus

    The US may be a great empire, but one that is currently stuck in Iraq and Afghanistan. As such, while the US is single-mindedly dedicated to defeating the 14th century, the rest of the world has passed it by. The US is rapidly becoming irrelevant — too bad it hasn’t found that out yet.


  31. mario

    “A study by the Sloan Foundation in 2007, for example, found that only $4 of an iPod that costs $150 to produce is made in China, even though the final assembly and export occurs in China. The remaining $146 represents parts imported to China. If only the value added by manufacturers in China were counted, the real U.S.-China trade deficit would be as much as 30% lower than last year’s gap of at $226.8 billion, according to a number of economists. ”


  32. dianne

    At the ground level which is my view, the US economy is nowhere, i repeat, nowhere, it has been ever before…nowhere…we manufacture close to zero…total dependence outside of our country for every essential to survival…the most egregious theft, ever…

    The PRC has used its so-called ‘soft diplomacy’ (where have we heard this before) to conquer our open, ‘free market’ economy; and, finally, it owns us; our nation, thanks to a generation of financiers, bankers, and business/politicians lacking in conscience and allegiance to the Greatest Nation on Earth, their nation of birth, couldn’t bend over and with great obsequiousness, scramble to polish the way.

    Not only has the USA has lost all of its great manufacturing capacity and all related industries; we have lost control over the food sold in this country.. … The USDA (or FDA), after running a pilot poultry testing program in China found that it failed meet U.S., USDA standards for poultry and prohibted its importation. Because the PRC was planning on exporting to US markets 100s of million of lbs of chicken meat, it filed an UnFair Trade Practice claim with the WTO against the United States of America. In late July/August 2010 the wto court ruled in favor of china…whereby the USA MUST IMPORT millions of lbs of chicken breast meat from the PRC THAT FAILS TO MEET USDA POULTRY STANDARDS!

    I admire the incredibly knowledgeable and intellectual caliber of the contributors on this blog… and yes, brilliant scholars long before knew what would happen if…and didn’t do it…yet our selfish, greedy, MBAs did it anyway and ran away with our treasure leaving 300 million people blown away, strewn along the way..the reality on the ground is: we are in the midst of a massive Trade War on all fronts…and there will be WAR….by the people of this great nation if our government continues along the path of implosion and fails to extricate itself from WTO, GATT, etc…and stop all foreign aid until such time as we are again a free and self reliant nation and provide for our own; and exercise true, competent, and courageous leadership… in two decades, the current crowd has destroyed everything built by prior generations, including the Greatest Generation..those who came before us. The consequences of this assault shall reverberate stronger than a no. 7 Earthquake as measured on the Richter scale. The outsourcing, HB-1 visa, digital tsunami destruction of the US job market…the absence of any immigration policy, industrial policy, labor policy has resulted in a dumping ground from around the world to work at the lowest dollar amount w/no ‘benefits’. The mad, inexplicable concentration of supreme wealth in the hands of a human resource software developer for enabling a business to find an employee, with the world as your ’employement’ pool, what do contracts in the tens of millions let by our government to global defense/aeroneutical contractors…. action by average Americans is not far off no matter what the ‘official policy’ is. After all, the people of this nation never had a say whatsoever in the redistribution of the power from the American people to multinational institutions and corporation. It’s too clear the current crop of candidates year in year out are the recycled pols like Kasich and others who have no knowledge of US history. War against the PRC is here especially given the little bilateral trade compact between the PRC and “Taiwan”.

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