By In my prior posting about the Chinese currency reevaluation issue, I admitted to not being an expert on international business trade, but here is a guy who is and he says the currency issue is not really a problem:
President Barack Obama headed to the G-20 Summit this week with a major goal: limiting China’s and other countries’ current account surpluses.
China is being singled out for a reason. Its current account surplus with the U.S. this year may run to $250 billion, far more than any other country. To many, this shows China is manipulating its currency, destroying jobs and limiting growth in the U.S.
Nothing could be further from the truth. But the truth is much harder to find these days than scapegoats. Fortunately, economics can move the debate beyond finger pointing.
Countries that run current account surpluses save more than they can fruitfully invest at home and invest the difference abroad. Countries with current account deficits do the opposite. They save less than their economy’s investment needs and attract investment from abroad.
Surplus countries take some of the seed corn they’ve saved and plant it in deficit countries. This physical movement of the seeds, or capital, is recorded as an export of the surplus country and an import by the deficit country.
Nations with current account surpluses are net exporters and have trade surpluses. Those with current account deficits are net importers and run trade deficits. Indeed, apart from the net income foreigners earn in the U.S. and invest in the country, their current account surplus equals their trade surplus, and their trade surplus is, apart from a minus sign, our trade deficit.
If China’s trade surplus is really due to it investing in the U.S., why does this drive us crazy? Would we prefer the Chinese invest in, say, Iran? The more China invests in the U.S., the more capital U.S. workers get to use, making them more productive and helping them earn a higher wage. [Joong Ang Ilbo via The Korea Economic Reader]
You can read a whole lot more at the link.
12:35 pm on November 13th, 2010 1
Currently the US is devaluing their own currency. To boost jobs and compete against China. The Chinese RMB will slowly and gradually grow in time.
Remember, the investment that China made in the US is 'lending the US money' (buying Tbills)… This is why the US pays China hundreds of millions in interest every month (if no billions). So China is like a big huge bank. One of the oldest business models in existence. Basically the US hates being on the wrong end of the 'credit card' equation.
Scary stuff.
1:11 pm on November 13th, 2010 2
What kind of logic is this? They got you guys by the penis sacks.
Not a problem? OK, bury your heads in the sand and pretend everything is OK until they tell you what to do.
You guys are not only bankrupt, you guys are mentally deficient.
2:51 pm on November 13th, 2010 3
Obama should use his oratorical skills to lead us to a lower dollar, more exports, and fewer inputs.
3:41 pm on November 13th, 2010 4
As long as the US continues to consume more than it produces it will run a trade deficit. If capital flow into the US was cut off by some policy action, interest rates would rise until the loanable funds market was again in balance. That would mean less consumption, less investment, and more saving, all as a result of interest rate hikes.
I don't imagine the overleveraged US housing market and banking system would respond well to a drastic rise in interest rates at this time.
If Obama wants to reduce the trade deficit he should try borrowing less money. The Chinese (and others) would exchange less of their currency for dollars with which to buy treasuries, and this would lead the dollar to fall, until increased exports/reduced imports brought the currency market back into balance.
1:17 pm on November 14th, 2010 5
China doesn't devalue its currency as so much as remove its currency from global circulation. By paying its people with Chinese currency but requiring USD (or equivalent) from other nations it creates a domestic market control. Chinese domestic products are dirt cheap in Chinese currency but US / Korean / Japanese / European products are ridiculously expensive in China because their priced at foreign currency levels not the local Chinese currency. China's monetary policy is designed to prevent a middle class from forming and to arrest its development should one start to arise.
The typical scenario of a free market country is that it starts off poor and acting as a source of cheap labor. Over time as money from other countries floods into the poor country its people's quality of life and earning potential rise. As a middle class develops the poor country is no longer poor, their middle class starts demanding products from other countries. This middle class also serves to increase the value of the domestic currency which further increases the buying power of the middle class. Now two things start to happen, first the cheap labor part starts to die off as labor costs rise due to a combination of higher salary demands coupled with higher valued currency. Second the demand for foreign goods goes up and the country's imports to its trade partners rise which results more money flowing to its original trade partner. This is what all those US business's expected would happen in the 80's and 90's, they didn't see cheap labor, they saw cheap labor and a potential 4.3bn+ potential market. They wanted access to market their products to the upcoming Chinese middle class.
China as a country has been doing everything possible to keep a middle class from forming without sacrificing money making ability. Lower / slave class citizens are too preoccupied with trying to survive and provide for their family's to bother with things like rights, freedoms and laws. They also buy exclusively domestic because that's all they can afford and they work till they can no longer work then they die. From a authoritarian governments perspective they make the ideal model citizen. A middle class demands freedoms, rights and equal legal treatment. They expect to be able to enjoy their life and want to retire and exit the work force eventually. They buy a mix of domestic goods with foreign luxury goods thrown in the mix because they have extra disposable income to do this with. They are not an ideal citizen to have and represent problems to an authoritarian government.
Now seeing all this it makes perfect sense why China is manipulating its own currency as much as it does. It has gone so far as to create a law that any foreign country that wants to sell products in China must first make available its intellectual property, designs and technology to a Chinese domestic manufacturer so that the domestic manufacturer may make a competitive domestic product. China does not want other countries products being sold domestically at anything near affordable to a middle class. They would prefer their economy stay exclusively China only but the rich upper class elites want their foreign luxury goods and their the only class with the ability to directly threaten the government.
2:04 pm on November 14th, 2010 6
Just incase ~anyone~ tries the ole "The US owes China all its money" bull hockey I'll include the real data about US debt and foreign ownership.
As of 2010
Gross Nation Debt: -$13,795,178,572,773
Social Security Trust: +$2,558,280,531,307
Other Federal Trusts: +$4,587,728,652,454 (FICA / Gas Taxes / ect..)
Total Net Public Debt: -9,207,455,681,502 (the clock was ticking as I copied / pasted these so their will be small errors in the 10,000 range).
Source: http://zfacts.com/p/461.html
That is 9.2tn public debt.
Foreign Owned debt: 4,065,800,000,000 (4tn)
Top 5 Holders of that debt
China (mainland): 846.7bn 20.8%
Japan: 821.0bn 20.2
United Kingdom: 374.3bn 9.2
Oil exporters: 223.8bn 5.5
Caribbean Banking Centers: 150.7bn 3.7 (tax hideaways)
So you see, China only holds 9.195% of US dept, no where near enough to make any significant impact on our economy. The biggest holder of our debt is our own federal reserve bank.
6:13 pm on November 16th, 2010 7
Love that you are branching out into the global economics arena, but this seems like a confusing piece to start with.
Lets begin with the proposition that raising the value of yuan vis-a-vis the dollar won't make Chinese goods more expensive since the internal price of producing those goods will fall. Will the "internal price of producing goods" in China fall decrease if the value of the yuan is increased? No, that is false. Much of the "internal price" of producing goods in China is labor. The only way for that "internal price" to fall is for companies to pay all their workers less on the basis that the Yuan is now worth more vis-a-vis the dollar. Sucks for the workers though, since they need to buy stuff in China, and not the US (of course, if they did buy more stuff from the US as a consequence then the argument would again fail on its own terms), so all workers will be forced to take wage cuts with no corresponding benefit in order to reduce "internal prices" to fit the author's model. Brilliant analysis.
There are about a million and a half other idiotic pieces to this analysis, but not really worth mentioning here. Just try and think through the premises the author relied upon here. They are mostly bunk.
I Googled this guy to see if I could find out where he is coming from and found a recent Reuters piece he wrote which starts with this: "Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills." That is, of course, TRUE. Spending more and taxing less will both increase the deficit; by definition, only spending less and taxing more would decrease the deficit. But what is the use of suggesting two deficit increasing measures as the red herrings which will save us from bankruptcy? Maybe we should simply avoid bankruptcy by spending less and/or taxing more, depending on what side of the political spectrum you fall into. Is that too difficult for an economics professor to understand?
Ohhh .. yes, and his freakish hypothesizing about wild deficits and bankruptcy is pretty weird. SomeOtherGuy hit that, however, so I won't bother.
Main point: I am not sure this guy has everything together upstairs, to put it mildly.