Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Display:
Just re-read my own "intense" diary from 2008 and the comment thread. I think it's an interesting case study of why you need sector-balance analysis, which took us about two more years to discover on this blog...

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Aug 24th, 2015 at 12:16:32 PM EST
it's an interesting case study of why you need sector-balance analysis

Is that this?  Could you elaborate?

Point n'est besoin d'espérer pour entreprendre, ni de réussir pour persévérer. - Charles le Téméraire

by marco on Mon Aug 24th, 2015 at 10:52:55 PM EST
[ Parent ]
The three sectors ... external, domestic private, and domestic public ... have to add up to zero. So what is critical is the direction of cause and effect, and mainstream economics is focused upon telling a "micro-founded" story of cause and effect in which the real causes are in theory ineffective, and so their real effects instead have "micro" level causes.

So, the US suppress worker wages, which suppresses income-financed consumption. The US progressively eases restrictions on debt creation, directly in support of the transactions income from debt creation to the political donors on Wall Street. Indirectly, this leads to trade deficits, which help sustain trade surpluses in China. The trade surpluses in China combined with government policies pursuing high rates of investment require high rates of saving.

Flip around cause and effect, pretend that the high rates of saving in China are a cause rather than an effect in the triple balances, and now the trade deficit is "China's fault", and pursuing balanced trade now requires suppressing wages.


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 Tue Aug 25th, 2015 at 12:52:13 PM EST
[ Parent ]
BruceMcF:
the US suppress worker wages, which suppresses income-financed consumption... Indirectly, this leads to trade deficits

But what makes the difference between US domestic demand suppression and German, that leads to a trade surplus?

I used to be afew. I'm still not many.

by john_evans (john(dot)evans(dot)et(at)gmail(dot)com) on Fri Aug 28th, 2015 at 05:20:41 AM EST
[ Parent ]
Wage suppression + productivity advances lead to a shortage of demand - the nation isn't paying workers enough that they can afford to buy the products, experiences and services those same workers can produce. In a closed system, this would very quickly lead to an economic death spiral as surplus workers are fired leading to even lower demand, ect.

 Germany is avoiding.. well, really, postponing. that problem taking a really insane percentage of the output of German workers, putting it in shipping containers and sending it abroad - not in trade for other goods, because imports are sinful, you know, but essentially to keep people working. just.. because.

The US mechanism of postponement has been to finance the consumption via debt. Instead of paying workers enough to fully mobilize the means of production, the labor force gets a credit line. This results in imports because a lot of said credit is foreign.

by Thomas on Fri Aug 28th, 2015 at 08:22:56 AM EST
[ Parent ]
Yes, the Germans constructed a system to create the credit for intra-EU exports, boosting German exports without raising it's FXR, because its maintaining an artificially low FXR by having countries like Greece in the Eurozone.

Since the FXR rigging is via building a (broken) monetary union instead of by active intervention, the objections to Asian neo-mercantilism are thereby ducked.

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 Fri Aug 28th, 2015 at 10:16:35 AM EST
[ Parent ]
(W)hat makes the difference between US domestic demand suppression and German, that leads to a trade surplus?

In the US elites who had captured control of government proceeded to maximize their persona revenue without regard for the impact on the overall economy because they could. Manufacturing was "offshored" far beyond the ability of the remaining manufacturing sector and other sectors to produce even a neutral trade balance. Germany seems to have acted much more responsibly and with careful attention to trade balances.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Aug 28th, 2015 at 12:32:03 PM EST
[ Parent ]
Michael Pettis on China

In an essay dealing with coverage of international economics entitled Michael Pettis: China's Economy, Internal And External Balance, Pettis compares his own approach In The Great Rebalancing to that of another author, Peter Timis' The Leaderless Economy:

Both books analyze the global economy in pretty much the same way, as an economic system in which any country's domestic economy is inextricably linked to other economies through the balance of payments mechanisms. The ability to place events within their global context is consequently crucially important in understanding any country's economic performance, but actually doing so tends more to be the exception than the rule.
....
The Leaderless Economy makes the same point I try to make in The Great Rebalancing: the economic analysis of any country is largely useless if it ignores, or treats as a minor issue, links with the external sector - i.e. other countries - and this is even more true today than in the past. Even something as important, and as seemingly "domestic", as the US savings rate (which for most people is assumed largely to reflect cultural preferences towards thrift among American households) is not determined primarily by American households but rather by its links with savings distortions abroad.
This might seem a profoundly counterintuitive statement, but in fact you only need to understand two or three accounting identities to be able to work logically through the explanation. I showed why one country's savings rate is as likely to be determined by domestic distortions as it is by distortions abroad in a blog entry on whether a savings glut must cause global savings to rise. In another blog entry, I explained why a low savings rate in countries like Spain was a necessary outcome of policies in Germany that effectively restricted wage growth. And finally I showed how - because of the role of the dollar in reserve accumulation and, more generally, the unrestricted ability of foreigners to buy US assets - the US savings rate is determined largely as a residual needed to balance net capital flows, in a blog entry on the so-called exorbitant privilege...

I could not agree more. Between the two quoted sections is a very cogent example of just how important this relationship is. The effects of international trade on one country's economy could be seen as the combination of the three sector accounting identity for each country linked to the other countries through the import/export terms. (Another example is all of the history I read before becoming modestly economically literate.)  :-)

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Aug 29th, 2015 at 11:15:19 AM EST
[ Parent ]

Display:

Occasional Series