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I agree that a high discount peg weakens wage bargaining power in other countries, but still it means to give away one's goods for less than a free market price.
The idea, why economists have thought it might work out for both China and US, was that the US economy is so flexible and innovative, that even when losing old jobs, the US would easily create new jobs in different branches. So while China would get jobs, the US would get cheap products and still could have low unemployment (which is confirmed in a sense by the numbers of the past years).
The bad thing was, that too much of the extra working and credit capacity was only used in the credit distribute branch, instead of productive branches. It could have worked, if the extra work and capital capacity provided by the Chinese peg would have been used for investing in the future, like fossil fuel replacement...
Then at some point the Chinese imports would have replaced e.g. oil imports and it would not have distorted the long term US current account balance.

I don't think at all, that the Chinese gov is happy with the current situation. They just don't know how to come out. This is of course to some degree speculation, but it is clear, that abolish the current arrangement would create distortion in China. It is as well clear, that currently some investment is done in China, which won't be profitable any more, once the exchange rate moves significantly up. And keeping export subsidies going indefinitely is expensive.

The CA deficit of the US is much larger than the Chinese surplus. -> The responsibility for the US CA deficit is certainly not mainly China's.
China-EU trade is bigger than China-US trade. -> Everything which is due to China in the US economy should occur here, too (yes pressure on wage bargaining power is in the EU, too, but the CA deficit is much smaller).

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Sun Jun 1st, 2008 at 04:36:20 PM EST
[ Parent ]
... is that if an economy has exhibited some characteristics ... "the US economy is so flexible and innovative" ... it will continue to exhibit it, and if only the government will stop intervening it will exhibit its intrinsic features that much more strongly.

When in reality the policy push for more "flexibility" in fact undermined much of the social infrastructure that gave such strong support for the "innovation", so the idea that those were intrinsic "natural" features of the US economy, entirely independent of government policy in terms of providing social infrastructure, was just wishful thinking.

The Chinese government, first and foremost, wants to avoid the mass unemployment that would result if growth dropped down to a sustained rate of 3% or 4% ... so, yes, of course they are not happy with every consequence of their current policy, but they are only going to move to an alternate policy if they think that either the growth potential of the current policy regime has run its course, or that there is an alternate policy regime that offers at least the same growth potential and other benefits on top.

On the US current account, no, the trade deficit with the neo-mercantalists do not directly account for the whole trade deficit. However, between the direct trade deficits with the neo-mercantalists and the side-effect on the US trade deficit of the artificially high value of the US$ that the neo-mercantalist pegs helped to maintain for so long, a lot of the push of the current account deficit beyond a sustainable range certainly can be traced back to the neo-mercantalists.

The other side of the push of the current account deficit into the unsustainable range is, of course, the ever-increasing sectoral deficit in energy. That was rising on the back of increased volume of net energy imports, and is now getting further amplified by the decline in terms of trade for energy importing nations.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Jun 1st, 2008 at 04:52:04 PM EST
[ Parent ]
wishful thinking + advertising by US gov/business leaders

Actually as the US CA deficit was until recently larger than official financing of it, private investors must have believed as well in superior returns in the US. Otherwise the official inflows would have been accompangnied by private outflows, as it happens about since last summer, when the credit crisis became publicly aware.
This happens as well currently in the Euroarea, where private money flows largely out, while official money comes in.

I responded originally because it seemed you give the Chinese kind of a moral responsibility for the current situation in the US. Besides that the mercantilist policy has elevated hundreds of millions of Chinese out of poverty, this was an opportunity - a risky one, but still - to make large investments into the future with low interest rates and low inflation at the same time in the US. And it were not only private people who borrowed the money, but as well the gov, which obviously believes, that the future lies in a superior military. Without Chinese financing, the wars in Iraq and Afghanistan would be much more painful for the US tax payer. And to use this oppurtunity that way, was a decision made in the US, not in China.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Sun Jun 1st, 2008 at 06:34:18 PM EST
[ Parent ]
... to commercial pursuit of long term investment opportunities ... there is also the net capital flows out of low income countries into high income countries, which is of course counter to the capital scarcity theory of how financial capital ought to flow, but makes perfect sense if you put yourself in the shoes of the wealthy in low income nations.

And of course, there are the capital flows still ongoing, even if not as great as in the earlier years of the decade, where Euro-zone based companies buy out Euro-zone assets owned by US-based companies ... that is a capital flow into the US, but rather than being based on any assessment of the long term appeal of the US as an investment proposition, is rather a legacy of past overseas investment by US firms.

On the moral responsibility of the Chinese government ... consequences for internal imperialism policies in Tibet, Inner Mongolia, Xinjiang ... that would be moral responsibility. Impact of a neo-mercantalist currency policy to export unemployment to a nation whose ruling elite seems positively eager to import unemployment ... given the vulnerability of many of those hardest hit, there's a clear moral responsibility there, but its hard to see how it can be laid at the feet of the Chinese.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Jun 2nd, 2008 at 01:31:34 AM EST
[ Parent ]
Nearly bought it, but then something came to my mind. European banks (incl. CH) have lost more than 100 bn $ recently on dubious credit based assets - and the losses are only a fraction of the investment and we speak about banks, not about hedgefunds, which were also in this business. I know even privately people who have invested in US real estate.
So there is lots of evidence that there was a lot of private money inflows into the US before summer 2007. I have strong doubts that Europeans were buying back more Eurozone assetes than Americans bought new ones.


Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers
by Martin (weiser.mensch(at)googlemail.com) on Wed Jun 4th, 2008 at 07:24:45 PM EST
[ Parent ]
... to wishful thinking ... and since there's plenty of pandering to wishful thinking on both sides of the aisle, the "he said / she said" style of journalism can entirely avoid noting that its all naught but wishful thinking.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Mon Jun 2nd, 2008 at 11:54:05 AM EST
[ Parent ]

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