But no, it doesn't address the question of the necessity, by some macroeconomic mechanism, of foreign currency reserves accumulated in a country or countries leading to recession in the emitting country.
The entry of China's army of cheap labour into the global economy has increased the worldwide return on capital. That, in turn, should imply an increase in the equilibrium level of real interest rates. But, instead, central banks are holding real rates at historically low levels. The result is a misallocation of capital, most obviously displayed at present in the shape of excessive mortgage borrowing and housing investment. If this analysis is correct, central banks, not China, are to blame for the excesses, but China's emergence is the root cause of the problem.
Thanks for the link in any case, that's a very good post by Jerome. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
In the Jerome economy labour is cheap and real investment capital is scarce. This is deflationary in terms of real earnings and likely future returns on practical investment.
In the Wolf economy labour is a footnote and financial investment capital is plentiful. This is apparently deflationary, but in fact it traps all of the productivity gains created by cheap labour which means it's pure distilled growth which is then releveraged.
The real economy deflates while the financial economy bubbles. Some of the financial economy trickles down to the real economy in the form of toxic cheap loans which disguise the deflation/recession, and which then bubble up again as fake collateral which makes the financial bubble even bigger.
In fact the argument is almost entirely political, and the aim is to blame China instead of accepting blame at home.
It would have been possible to grow the real economy - especially green and tech - with real investment.
Instead the money went elsewhere - and not just to China, but on corporate welfare projects, including the Iraq war.
Claiming that China is responsible is like blowing your legs off with a hand grenade and then blaming the company that made the pin.
One of the main characteristics of the financialisation of the economy aka "Anglo Disease" is high and increasing return-on-capital requirements. In the bubble economy, it has been sink or swim on this criterion (little or nothing to do with useful competition in the real economy). Corporate survival itself was based on it (lose market cap, get swallowed by a bigger fish), hence the huge payouts to top corporate officers (keep the market cap high, the next quarter's expectations shiny, and you're the CEO who can name his price). And the results of this high profitability were not going to productive investment in the real economy, but sloshing around in the US and globally looking for yet higher (inc. speculative) returns. Labour (Asian or Western) and the real economy were/are/will be footing the bill for this froth.
Suggesting that all this was the mechanical result of a macroeconomic imbalance, while the Chinese were alone in making political decisions, is the usual conservative/marketista gambit: those who do politics are always on the other side.
Well, labour is cheap and capital is scarce globally but in the US you have relatively high labour costs and plentiful capital so the tendency is for US capital to seek investment opportunities abroad and that is deflationary/recessionary within the US. But the answer cannot be to reduce interest rates because that just makes the US less attractive for capital. One way or another the US government needs to stimulate investment in the US economy. Monetarists just lowered interest rates which created an asset bubble and no real investment, because they are mostly concerned with the putative effects of a monetary contraction which they try to fed off. A fiscal solution would tax away the excess capital and reinvest it directly. But the reason there is a problem in the first place is that there is free cross-border movement of capital. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
It wasn't enough to try to globalise the rest of the world - the caste also decided to globalise the US itself.
Financially the US is now literally two different countries, joined nominally by a federal government which is contiuing to move cash from the real economy into the financial economy because what happens in the financial economy benefits everyone.
Supposedly.
Taxation, regulation, limitation of free capital movement, and reinvestment all have to be tied into a package - ideally with criminal charges for fraud.
But at the moment it's looking more likely that more bailouts will continue to be 'necessary' until bailouts stop being possible, real investment which will be decimated, and profit will be stripmined from the real economy and dumped into useless items like gold bullion.
Capping bonus culture, to the extent that it happens at all, doesn't even begin to address the real issues.
And we're losing the narrative battle again, because while people are angry about the bankers and idealistic about Obama, there's no practical or narrative push-back happening. A bit of sniping on TV from aggressive journalists doesn't count as a sea change - what counts is policy change, and there doesn't seem to be much likelihood of that yet.
Maybe the most pertinent comment among the many analytical gems here. I can swear there ain't no heaven but I pray there ain't no hell. _ Blood Sweat & Tears
And real capital has been by no means as plentiful in the US as financial capital ... real capital formation has been sluggish for the whole of the current decade. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
It's lipstick on a pig, and China bought the pig.
Bernanke is blaming China, but both he and Greenspan were the ones armed with the lipstick.
I don't entirely agree with Migeru that the bubble was exclusively for Wall St's financial benefit. I think there was an obvious political need after 9/11 to make it look as if Big Brother was raising the chocolate ration.
In fact what we got was a combination of PR spin and classic Keynesian deficit spending on a war. Unfortunately the war wasn't winnable and instead of retooling the economy for total war - which would have been impossible politically, but would have done the job economically - some of the cash was handed out as free money to the mil-ind people, and the rest was snorted as derivatives, et al.
Meanwhile the real economy was tanking, and this had to be disguised - or at least the inevitable outcome had to be postponed for as long as possible.
China was never the problem, because if China hadn't supplied cheap labour, it would have been some other country or mix of countries.
Aside from the corporate welfare angle, another major part of the problem was the US energy sector, which continues to be a massive drain on US capital. If there are 'savings' anywhere, that's a good place to look for them.
Enron died soon after 9/11, but privatised energy has been screwing consumers and businesses ever since, and generally acting like a very heavy boat anchor tied to the real economy.
A better way to avoid a recession would have been to regulate and redistribute wealth from energy profits, and to invest that money in retooling the economy for energy independence.
But that was never going to happen with 43 in the big white house. So - here we are.
Effectively Wall St is now a microstate of its own, and treats both the US and China - and the rest of the world - as its fiefdom. Where the real economy in the US has been entirely passive about its colonisation, China has been slightly - but only very slightly - more robust as a trading partner. This has attracted some minor disdain from the Barons, but not much more than that.
Nothing in the last few weeks has changed this in any way.
A useful question to ask now is - where are the savings which supposedly caused these problems?
The saving evidently existed in the sense of income handed over from the recipients to be spent by someone else. Whether the savings exist depends on the ability of those who made promises to keep those promises ... since a person or people (often in the guise of a going concern) making a promise who is ready, willing, and able to keep the promise is what a financial asset consists of. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
