I believe China is very well aware of the problem encountered by Japan after Plaza Accord in 1985, and Chinese officials are trying very hard to avoid following the footstep of Japan. Unfortunately, as time goes by, they are unintentionally following the footstep.Also sprach Analyst
Excellent piece. I cant understand why people object to foreign investment in the US. When foreigners buy an office tower here, we get the money and the tower stays here. The Japanese did not ship Rockefeller Center to Tokyo. Foreign investment is a sign of confidence in America, not American weakness.
The US needs to worry because of all the jobs that have been shipped overseas. We buy crap from them that we should be making in the US. We have 9.5% or 17% or 22% unemployment depending on who you believe and we have 45 million people on food stamps. Is it better for the US population to be fully employed or is it better for 75% of the population to be able to get a cheap new ipod every year, or 10 pairs of shoes every year? Near 20% unemployment is a BIG deal. Ultimately, the national security of the US is at stake if the currency continues to lose value. The US must currently import over half it's oil, if the world is no longer willing to accept dollars for oil, or the price goes too high, US society will be hit with a shock which will compound our misery.
The Chinese don't have to wait for devaluation to lose money on their Treasury purchases because due to the undervalued yuan, which helps sell their goods, they are and have been paying more for the Treasuries than its worth to them. This is why and undervalued currency doesn't work. What you gain in one sphere you lose in the other. Why all the brilliant economists and people that call up all of these 'Accords', 'Steralizations', etc have their heads up their asses. Its a simple matter.
China is a developing country with a brutal population policy, a limited safety net and a mercantilist economic policy. Instead of investing in the next generation, Chinese are forced to save by acquiring assets. This policy throws the whole world off balance and will have catastrophic consequences for the Chinese over the next two generations. The Chinese should spend on the children they want to have rather than buying treasuries through their government.
excellent post
I would suggest that the Chinese government drivers are very different than those of "capitalists", what Chinese leader worry about are riots, and social breakdown.Creating a society where consumption accounts for less then 1/3 of GDP (vs 2/3 for America) tells you something about their priorities. Full employment and not profitability are core elements of China's economic policy. I also doubt that China's yield on US bonds is around 1.5%, simply because China has largely stopped buying US government bonds over the past two years, and the great bulk they did buy were long dated, when interest rates were higher.China's inflation rate is north of 3.5% (if you exclude housing costs) as such their currency (which has not changed in value for the past 3 years), is deeply undervalued.The issue is always the same, it takes two to tango, Americans are consuming too much (consumption is 70% of GDP), and Chinese are consuming too little. part of the problem is that the Feds still think that pushing consumption is a good idea.America needs to consume less, save more and Chinese need to consume more and save less.
And in related news, China lobbed trial balloons regarding the suspension of rare earth mineral exports. China produces 97% of rare earth minerals, which are essential to high-tech manufacturing.
The Chinese should let the free market determine the exchange rate of the yuan.
Scott,It would be helpful to know what you regularly read as well as some of your 'top' books. Enjoy your posts!
Scott,It would be helpful to know what you regularly read as well as some of your 'top' books. Enjoy your posts!
Scott,Excellent post, as always. On a related note, during Bernanke's reappointment, there was some concern about the Fed's independence from political influence and Ben gave some token reassurance. Now we know. Substitute total monetary policy for fiscal policy, fire up the presses and monetize the debt. Hello inflation. The 5yr 5yr forward measure of inflation (the Fed's favorite)has moved up about 76 bps (16%)since the first of September.
Market Factors,Even if Chinese appreciates yuan, jobs will never go back to the U.S. There are many places which can manufacture stuff cheaper than the U.S. How about India, Pakistan, Vietnam, Mexico, Cambodia, Indonesia, Philippine...
Benjamin, yes Chinese should not interference the Yuan exchange rate and so does the dollar!
Instant:You may be surprised. Manufacturing platforms in other countries are often not reliable and corrupt. Just try doing anything in Mexico. Electricity can cut out--and needs a bribe. Deliveries mysteriously disappear.Most Third World nations are poor due to corruption, graft and massive laziness or indifference. Hard work and (relatively) good government define China and Japan. That's why they climbed out of poverty so quickly.In a rare bit of good news, a cabinet importer in Los Angeles I know has been bringing in stuff from China. At first the minimum order was 6 units. Then 20. They just got told the minimum order is 50.China is going the way of Japan in 10-20 years, and there will be no more huge, efficient low-cost manufacturing platforms left on the planet. India is there, but stifled by culture and government. You really think you can make cars in Pakistan? Want some opium with that?
In one sentence you highlight the Japanese experience for buying US property while simultaneously getting slammed on fx, and in another recommend the Chinese government allow their populous to buy foreign assets to their liking, which in this case, will simply be US assets. Again, while their currency appreciates against the dollar. How do you reconcile this view? China should raise interest rates so people can save less by earning more and stop diverting every penny into manufacturing and exports through subsidies of all sorts. This would spark domestic consumption. The transition is always bumpy but the destination is far more optimal.I think what Scott will never understand because of his unwavering belief in comparative advantage is a necessary + healthy balance in all aspects of life. Every equilibrium is not created equally. The ripple effects of unsustainable behavior are felt by all peoples, albeit to differing degrees.The US is now financially depriving massive segments of the population via disincentives to save similar to Japan and China. Whether through tax structures benefiting debt or zirp interest rate policies. There is a very real and unhealthy balance and if left unfettered, all economies will come down hard when the next equilibrium evolves. The current equilibrium is neither healthy nor sustainable.
Think back 20-30 years ago, Ben could you ever imagine China will be such a big huge, efficient low-cost manufacturing platforms? Sorry I didn't. Then why you think other nations cannot repeat what China's miracle? History repeat themselves. After the ww2, nobody believe japan could develop into such a modern country too.Ask your friends to find another manufacturer. There are many of them around. If this manufacturer do not want to do business with you because of the size of the order, find another one.Importers are smart enough to find the cheapest cost for importing stuff from other countries to the U.S. Non conventional cost are also part of the total cost. The importers have already put these "extra" costs into account; otherwise, they would have got broke long time ago.
Instant:Yes, I do not see another nation with the resources of China replacing China once China becomes too expensive. India is hidebound with culture and bureaucrats, lawyers and corruption. Sheesh, they still have castes in India. Africa is hopeless, and Latin America nearly so. I suspect manufacturing will migrate back to America in the next 20 years. Indeed, I see a long, long global boom, if only we solve some debt issues. Leave equity tax-free and tax debt. Something like that.
It is not the government's job to encourage (or discourage) savings. There will always be ants and grasshoppers. The government's role is to be neutral and let folks decide their own path. In the realm of monetary policy, neutrality means price stability. That should be the government's only role. Instability is harmful for major economies like ours, but it is deadly to emerging economies. It makes perfect sense for emerging economies to peg their currencies to ours, or at least it did historically when the US monetary policy was stable. Floating exchange rates won't help China, it will only open them up to manipulation by large currency traders. They need more stability, not less. Raising interest rates won't help China, because it is contractionary. The best thing for China is also the best thing for America: a stable currency. China needs to gradually ease their peg to counterbalance our weak dollar policy. But if we practiced price stability, China could keep their peg fixed and realize stability as well.
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