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Stimuli And Global Balance
Obama is preparing a bigger stimulus package for the U.S. The rumored size is now $1 trillion. The U.S. already has a huge current account deficit. It consumes more than it produces. The stimulus will likely make that deficit bigger. But Paul Krugman will be happy now because he demanded a bigger package.
Germany, like China, has a large current account surplus. It produces more than it consumes. The German government is dragging its feet over spending more money on stimulus measures. Today Krugman bashes Germany for not launching a bigger stimulus on its own.
We have a group of countries, the U.S. UK, Spain, … that had a credit induced spending binge and produced little, while others, China, Germany, Japan, … produced for exports and saved.
There is an imbalance between those groups which will have to be adjusted one way or another.
When Krugman prescribes stimulus for both sides of the game there is something wrong with his thinking. Stimulus on both sides of the scale can not help to regain a balance. It only freezes the current situation.
So should the U.S. do a Keynsian stimulus at all?
As Yves Smith argues it is probably the wrong thing to do:
The US in the 1920s was the world's biggest creditor, exporter, and manufacturer. Our position then is analogous to China's now. Indeed, Keynes in the 1930s urged America to take even more aggressive measures, and argued that it was not reasonable for the US to expect over-consuming, debt-burdened countries like the UK and France to take up the demand slack. So even though most economists are invoking Keynes, it isn't clear he's prescribe such aggressive stimulus for the US and UK now.
The big U.S. stimulus package risks to crash the dollar. That may help to reignite local production, but will make the accumulated debt burden harder to carry as lenders will demand sharply higher interests.
Could China and Germany launch big stimuli programs to create local demand for all the surplus goods they export?
Michael Pettis, Professor for Finance at Peking University, says no:
The problem with this solution is that the scale of the adjustment is beyond the capacity of most countries. A decline in US consumption equal to 5 per cent of US GDP, for example (which is a low estimate), would require an increase in Chinese consumption equal to 17 per cent of Chinese GDP – or a nearly 40 per cent growth in consumption. This is clearly unlikely.
The German current account surplus this year will be some $250 billion. The total German government spending for 2009 is planed to be $400 billion. I doubt that Germany could raise that by 60% for a big stimulus and ignite consumption of that size.
M. Pettis:
That leaves one other way to adjust – a sharp decline in global production, with massive factory bankruptcies to end overcapacity. The burden of the adjustment will fall on trade-surplus countries, unless trade-deficit countries are willing to absorb a large part of it. But given political realities it is Asian production which is most likely to decline. The economic pain will be high and potentially destabilising.
There seems to be no way out.
Stimulus programs in the U.S. will help to soften the crash a bit, but they will not solve the basic problem of the need to global re-balancing. A controlled dollar decline over time might help in longer terms.
Stimulus in the surplus countries might induce a bit more consumption there, but will not solve the quite huge problems either. Whatever is available in financial means in these countries will be needed for social measures when production shrinks sharply and unemployment rises.
There was and is over-consumption in the U.S. and overproduction elsewhere. Both, global consumption and production, will decline for now to a globally lower level. Over the longer term, a re-balance of production capacity to consumption capability towards a more local level will have to be made.
All the current stimulus talk simply papers over this.
I think i was the first China Hand, but whatever. I rarely post, and it’s fine with me if others use the name.
At any rate: China start a war?
The number of wars of aggression China has fought in the last few millenia have been few and far between. Largely, what wars have been fought by China have been fought within its current territory, and that has typically been the pattern since, basically, forever.
Guangdong/xi, Fujian, Yunnan, Xinjiang, Sichuan, Gansu, Inner Mongolia — all of these provinces were once independent of Han control, but they were almost never brought in by conquest. Mongolia, of course, brought itself in by conquest — and that pattern holds for Gansu and Xinjiang, as well. Fujian, Yunnan, Guangdong, Guangxi, and the other more southern provinces were all at one time like Vietnam is today: essentially Han colonies that intermingled with local populations until they were eventually assimilated into regular government.
In the last, oh, eight hundred years, about the only place one can claim “war of conquest” in any meaningful sense is with Tibet, but if standards of international law have any meaning then that’s a very debatable point. Even if one doesn’t accept that, then the argument that the Chinese move was essentially defensive and reactionary is virtually impossible to refute. Tibet was first conquered and subjugated by the British, and remained firmly in their duplicitous orbit right up until the Chinese “brought it back”; that should be enough, there, but even if it isn’t then of course the Kissinger subterfuge (of arming and organizing the Tibetans as a guerilla force to be used against the Chinese) may be called forth.
Then, of course, there were Vietnam and Korea — but China didn’t start either one of those, and in neither case was interested in conquest. In both, China’s role was merely that of a puppeteer looking to install a government (succeeded in Korea, failed in Vietnam).
So while there are many paranoid Western bullies who would like to insist that China’s wartime past is just as bloody and aggressive as Euro-american colonialism, history ridicules them.
The biggest threat to China is internal dissolution. Essentially, China is four, five, or six different nations combined into a single political body; some are extremely wealthy and powerful (the central and coastal Han states), but essentially unstable (easy to invade, difficult to defend, and quite prone to cultural osmosis and change); others are “poor” in technology and wealth, but “rich” in ecological and cultural wealth (most of south China, maybe Tibet), while still others are simply poor or still developing (Inner Mongolia, Xinjiang, parts of Sichuan and south China).
The probability is not that China will “start a war” — that’s what the U.S. and Britain do, and it’s selfish and stupid to try and pretend like every nation, everywhere, follows their lead in that — but rather that China will break up into several different, independent bodies and then experience another 80 years of internecine warfare and barbarism.
The more China integrates with the rest of the world, the more likely it is the breakup will happen. Thus, the question of “Where and when, not if” is rather:
Where and when is the world going to step in and help negotiate the breakdown of a closed, authoritarian police state that’s currently keeping the lid on something like 1.6 billion people? Because unless our world has built up a robust international polity by that time, then the entire world will surely suffer, and a humiliating nuclear end to us all is not inconceivable.
Posted by: china hand #2? | Dec 16 2008 5:57 utc | 8
I completely agree w/premise (eg: Keynes inappropriate medicine), have been thinking the same for a while. Even assuming Keynes model is useful, seems to me that taking from Keynes the “rebuild infrastructure” mantra misses the point: back then, we had little infrastructure… we were building new stuff. I might characterize that as effort as having built what was wanted and needed for that day.
Sure seems to me like a more thorough creative thought process, determining what is most needed today, might occur to some of these PHD econ wags. Given vastly greater accumulated knowledge of today… I would consider a Keynesian excercise for today an active response to the question: what is most wanted and needed.
I also am quite certain such a process would yield entirely different target projects then roads & bridges.
As Barry Ritholtz said a while back (and I think you linked), get our best/brightest in econ/energy/physics/engineering (for starters) and create a Manhattan project for each. I’d also cut Wall Street out of picking winners and losers, maybe (just maybe) let them handle some of financing on a very short leash. They have failed… utterly. They have removed themselves from the game. Why some people (Paulson/Bernacky) try and move ’em back to front of line is beyond me.
And lastly, from your linked NC article:
London Banker’s arguments are two-fold: first, deflation is more likely than inflation because the underlying messes have not been cleaned up.
Is that ever an understatement… from where I sit, they haven’t even tried. And worse, the mess’ architects still in place waiting to do it again as I see no disincentive to dissuade them. I mean, shouldn’t those nimrods be headed to jail, instead of retooling ’em w/taxpayer $$? Why are rating agencies still rating? Why have we had no discusssion whatsoever attributing actions & implementation to GWB’s 8yrs of “free markets” and “capitalism”?
Note this differs from the commonly-held view that deflation can be cured without addressing institutional arrangements.
see my previous comment…
Second, he argues that punitively low yields will lead foreign investors eventually to retreat even from government debt. He argues that they will tire at throwing good money after bad, and will prefer to seek returns closer to home.
Aside from that being (IMO) simply stating the obvious, AFAIC that’s already happened here.
And referring to your early comments (Krugman/stimululus etc.) and idea it may be wrong medicine, I’d point out Pelosi has made (at least that I’m aware) 2 statements regarding stimulus and it’s size, both saying “name of the game” is “jobs, jobs, jobs.” Which for me anyway, only highlights narrow minded and thoroughly unenlightened approach to whatever BO ends up pushing for.
I mean, we can create jobs jobs jobs splitting rocks w/a sledge hammer.
I can’t express my disappointment in BO, 2 fold:
* failure to accurately articulate what got us here… eg. “measure the problem” and drive stake through the heart of it. Because it keeps happening again & again, just bigger each time.
* articulate a more creative, genuine & authentically original plan which utilizes all resources (human, material) available, as opposed to what really looks to me like cookie cutter, text book Keynesian template.
Also, I wonder… anybody else out there curious just what kind of “financial instruments” AIG is gon’a sell that will provide them profits capable of paying off their (what is it now?) $250b little loan thingie? Has anyone even asked? Am I the only one who gets the creeps just thinking about it?
Posted by: jdmckay | Dec 16 2008 23:24 utc | 23
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