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China-Manuf-Friedman-Mandel-Barbie-Reserve Currency-Fallows

 
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PostPosted: Wed Aug 27, 2014 5:28 am    Post subject: China-Manuf-Friedman-Mandel-Barbie-Reserve Currency-Fallows Reply with quote

PeakTrader:

China doesn’t want its currency to appreciate too much, which would cause its exports to become more expensive and its imports cheaper.

It needs to maintain export-led growth to maintain a high level of employment.

A “creative-destruction” process may cause a massive rebellion against the communists in power, before it’s completed.

Chinese work very hard for slow improvements in living standards, since much of their work is basically for free, and will retire very poorly, much more poorly than the Japanese.

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Sorry, China, There Is No Short Cut To Economic Greatness
Jan. 26, 2010

“The government that magically managed to report 6-8% GDP growth in the midst of the financial crisis, when its exports were down over 25%, tonnage of goods shipped through its railroads was down by double digits, and its electricity consumption was falling like a rock. It is hard to manufacture 8% more widgets with a lot less electricity…China did not suddenly become energy efficient during the financial crisis.

This is a government that will go to great length to maintain appearances to keep its ideology going. After all, it censors what its citizens may or may not read and imprisons the ones that write anti-government articles.

China will do anything to grow its economy, as the alternatives will lead to political unrest…Since China lacks the social safety net of the developed world, unemployed people are not just inconvenienced by the loss of their jobs, they starve (this explains the high savings rate in China) and hungry people don’t complain, they riot.

The Chinese government controls the banks, thus it can make them lend, and it can force state-owned enterprises (a third of the economy) to borrow and to spend. Also, since the rule of law and human and property rights are nascent in its economic and political system, China can spend infrastructure project money very fast – if a school is in the way of a road the government wants to build, it becomes a casualty for the greater good.

China has spent a tremendous amount of money on infrastructure over last decade and there are definitely long-term benefits to having better highways, fast railroads, more hospitals, etc. But government is horrible at allocating large amounts of capital, especially at the speed it was done in China. Political decisions (driven by the goal of full employment) are often uneconomical, and corruption and cronyism result in projects that destroy value.

Infrastructure and real estate projects are where you get your biggest bang for the buck if your goal is to maintain employment, since they require a lot of unskilled labor; and this is where in the past a lot of Chinese money was spent. This also explains why, in 2009, new floor space constructed was up 100% and residential real estate prices surged 25%. And this explains why they keep building skyscrapers even though the adjacent ones are still vacant.

To make things worse, before the financial crisis and enormous stimulus ($586 billion), China was already suffering from what I call late-stage-growth obesity, inefficiencies that are a byproduct of high growth rates sustained for a long period of time. Though Chinese growth in the past was high, in its late stages the quality of growth has been low.

For example, in an echo of past Chinese government asset-allocation decisions, China built the largest shopping mall in the world, the South China Mall, that is 99% vacant, years after construction. China also built a whole city, Ordos, in Inner Mongolia, on spec for million residents who never appeared.

The inefficiencies are also evident in industrial overcapacity. According to Pivot Capital, Chinese excess capacity in cement is greater than the combined consumption by the US, Japan, and India combined. Also, Chinese idle production of steel is greater than the production capacity of Japan and South Korea combined. Similarly disturbing statistics are true for many other industrial commodities. The enormous stimulus amplified problems that already existed to financial-crisis levels.”

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This is an interesting statement, from 2013, by a Rhodes Scholar Sanjeev Sanyal, from India (the article above was written by a Russian finance expert, who immigrated to the U.S.),

“The current account of any economy can be seen as the difference between its investment rate and its savings rate. In 2007, the US had a savings rate of 14.6 per cent of the gross domestic product (GDP) but an investment rate of 19.6 per cent. This was the ultimate source of its current account deficit. In contrast, China had a fixed investment rate of 41.7 per cent of GDP and a savings rate of 51.9 per cent. This was reflected in a large surplus.

Since 2007, the US deficit has narrowed — but not because of better savings. The country’s overall savings rate has actually fallen below 13 per cent of GDP owing to worsening government finances. Instead, we have seen a collapse in investment activity. Meanwhile, China’s savings rate remains stubbornly high. The surplus has narrowed because the government’s encouragement ramped up investment even higher to around 49 per cent of GDP. In other words, the factors underlying the pre-crisis imbalances have not been unwound and, if anything, have been exacerbated. The US saves even less today and China invests even more.”

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Joseph, trade deficits didn’t cause “secular stagnation.” Too little money circulating in the economy caused it.

Foreigners exchanging valuable goods for worth less dollars isn’t our “problem.” It’s their problem.

The U.S. had a steeper rise in living standards in the mid-2000s, and with less effort, than in the late-1990s.

Tax cuts, particularly for the “middle class,” and less restrictive monetary policy would’ve allowed the spending to go on.

Milton Friedman:

“The “worst case scenario” of the currency never returning to the country of origin was actually the best possible outcome: the country actually purchased its goods by exchanging them for pieces of cheaply-made paper. As Friedman put it, this would be the same result as if the exporting country burned the dollars it earned, never returning it to market circulation.”

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The U.S. offshored older industries, imported those goods at lower prices and higher profits, and shifted limited resources into high-end manufacturing and emerging industries. Real manufacturing output increased (and remained roughly constant as a share of world manufacturing output, although trade deficits increased foreign output), and the U.S. not only leads the world in the Information and Biotech Revolutions, it leads the rest of the world combined (in both revenue and profit).

At full employment, e.g. in the mid-2000s, trade deficits were much higher, which benefited the masses tremendously, not just the rich.

U.S. consumers bought foreign goods and foreigners bought U.S. Treasury bonds. Not enough dollars were “refunded” to U.S. consumers, in the form of tax cuts, by the U.S. government, to allow the spending to go on.

It’s better to trade worth less dollars for valuable goods than to trade valuable goods for valuable goods. Income = output. Do, you believe the U.S. is better off sending more output overseas or keeping more? If foreigners want to sell their goods too cheaply and lend their dollars too cheaply, to increase or maintain output and employment, why is that our problem?

So, we lost some manufacturing jobs and gained lots of retail jobs, along with manufacturing productivity and market power. Would you rather produce more and consume less instead to reduce your standard of living? Tax cuts and less restrictive monetary policy allow the U.S. to produce at a high level and consume at an even higher level.

It should be noted, high taxes, e.g. capital gains and the AMT, contributed to the 2001 downturn, although it was a recession so mild per capita real GDP fell very little at worst on top of the huge gains of the 1995-00 boom, thanks in large part to the Bush tax cuts and the Greenspan Fed. The 2001-07 expansion was the fourth longest in U.S. history with a very steep rise in living standards, in part, from the up to $750 billion a year trade deficits. In 2007, monetary policy was restrictive for too long, which caused the 2007 recession initially. The Bush tax cut in early 2008 allowed the Fed to catch-up easing the money supply and the U.S. was on a path towards a mild recession, until Lehman failed in September 2008. Large tax cuts, rather than the small and slow tax cuts, would’ve closed the output gap much faster, and the Fed would’ve completed a tightening cycle long ago rather than extending the easing cycle.

The U.S. was the main engine of global growth, pulling the rest of the world’s economies. It was able to expand, in spite of huge trade deficits. The U.S. economy was a “black hole,” in the global economy, attracting imports and capital, and even attracting the owners of that capital themselves.

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Doug Campbell:

@Peak Trader.

Careful with the stat that real manufacturing output stayed steady in the 2000s. As linked in the article, the official statistics are also fraught with the same index numbers problem as the Fed’s RER index: https://www.aeaweb.org/articles.php?doi=10.1257/jep.25.2.111. As much as a fifth to a half of the gains in real value added from 1997-2007 may not have actually happened.

Secondly, the overall job market from 2000 to 2007, despite a massive housing bubble, was not actually that impressive: http://research.stlouisfed.org/fred2/series/LREM25TTUSM156S

So, the story that everything was fine until the financial crisis hit isn’t quite right. Yes, had regulators done a better job inspecting loans, then there would have been no financial crisis. But with no housing bubble, the labor market performance would have been even worse in the mid-2000s, although I agree we’d have been better off without a fiscal crisis. And I fully agree more monetary and fiscal policy could have gotten us out of the “Lesser Depression” much sooner.

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PeakTrader:

Doug Campbell, I’m using the official statistics. For example:

Chart real manufacturing output: http://research.stlouisfed.org/fred2/series/OUTMS

If there’s bias to one side, there may also be bias to the other side. Here’s a related article:

http://www.businessweek.com/stories/2006-02-12/why-the-economy-is-a-lot-stronger-than-you-think

Anyway, there’s not much value in low-end manufacturing production:

The hidden downside of Santa’s little helpers
The Irish Times
December 21, 2002

“An investigation into the price of a Mattel Barbie doll, half of which is made in China, found that of the $10 retail price, $8 goes to transportation, marketing, retailing, wholesale and profit for Mattel.

Of the remaining $2, $1 is shared by the management and transportation in Hong Kong, and 65 cents is shared by the raw materials from Taiwan, Japan, the US and Saudi Arabia. The remaining 35 cents is earned by producers in China for providing factory sites, labour and electricity.

Toy factories hire the least-skilled workers…Sixty per cent are young women between 17 and 23 years old who live cramped in company dormitories, 15 to a room, earning just 30 cents an hour and often inhaling spray paints, glue fumes and toxic dust.”

Moreover, I may add, China, for example, doesn’t compete much with the U.S. in high-end manufacturing.

Furthermore, the U.S. economy produced above potential output and beyond full employment in the 1995-00 boom. So, employment growth wouldn’t look impressive in the 2001-07 expansion, because of the mild 2001 recession.

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Doug Campbell:

@Peak Trader: Sharp comments.

Even taken as-is, the Real Manufacturing Output you linked to already doesn’t look great since 2000. I agree there could be biases in both directions, but the biases in the article you linked to could well apply to all of the past half-century (though likely more pronounced in recent decades), while the biases from the rise of intermediate inputs from China would have only impacted the official statistics since the mid-1990s. This would make this period even more of an historical anomaly.

But, you raise a good point — there’s a widespread view that the manufacturing jobs lost are all low wage jobs, and therefore don’t matter. (I think this is wrong, since even if these jobs were low wage, there still could have been a macroeconomic effect and still could have hurt these workers’ employment prospects.) On average, it is true that the manufacturing jobs lost in the 2000s were below average wage for the manufacturing sector. But, perhaps surprisingly, the jobs lost were in sectors with average wages only 2% lower than average according to my quick and dirty calculations using BEA data. It could be that low wage jobs in high wage sectors were disproportionately lost, but then we should expect to see average wage gains in the sectors that lost the most jobs — we don’t. What’s more, since manufacturing jobs are on average high wage for the economy as a whole, these were likely to have been relatively high wage jobs lost.

Lastly, China has increased its market share in a relatively broad base of manufacturing sectors. In 1995, China had a 2% US market share in just a quarter of sectors, by 2007, it had captured a 2% market share in over 60% of manufacturing sectors… Which sectors in the US have done well in the 2000s? Think wineries. Think concrete manufacturing. Think cheese and tortilla manufacturing (and thank NAFTA). Think tank building, and armament manufacturing. These are all sectors where the US doesn’t compete with China. Sectors not nailed to the floor did less well.

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PeakTrader:

Doug Campbell, I think, U.S. real manufacturing output hasn’t been great, since 2007, rather than 2000 (it should be noted, the U.S. began a structural bear market in 2000, after the spectacular structural bull market from 1982-00).

Also, offshoring low-end manufacturing likely puts downward pressure on U.S. wages in those sectors, because of greater competition.

Moreover, I would expect China to gradually move into higher-end manufacturing.

The U.S. leads the world in the Agricultural-Industrial-Information-Biotech revolutions. An economy has to become more efficient in prior economic revolutions to move into new economic revolutions, because of limited resources. Offshoring helped facilitate the U.S. Information and Biotech revolutions.

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Joseph:

PeakTrader, who pretends to support lower taxes for the middle class, also supports an over-valued dollar and high trade deficits. An over-valued dollar is a tariff on domestic goods and a subsidy for foreign goods. An over-valued dollar causes higher unemployment for middle and lower class domestic workers. Why is PeakTrader in favor of taxing the middle and lower class to subsidize cheap foreign imports. Is it because he is not affected by the tariff and likes buying cheap goods subsidized by the middle and lower class?

If his concern is to improve the lives of poor foreigners, why does he favor taxing the middle and lower class to do it? Why isn’t he in favor of taxing the 1% to help foreigners.

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PeakTrader:

Joseph, why do you favor lower living standards for Americans?

Why reduce U.S. “gains-in-trade?”

The U.S. has benefited enormously from free trade, open markets, and unrestricted capital flows, along with the world’s predominant reserve currency.

Article by James Fallows:

James Fallows studied American history and literature at Harvard, where he was the editor of the daily newspaper, the Harvard Crimson. From 1970 to 1972 Fallows studied economics at Oxford University as a Rhodes scholar.

January/February 2008

Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China.

Any economist will say that Americans have been living better than they should—which is by definition the case when a nation’s total consumption is greater than its total production, as America’s now is. Economists will also point out that, despite the glitter of China’s big cities and the rise of its billionaire class, China’s people have been living far worse than they could. That’s what it means when a nation consumes only half of what it produces, as China does.

Neither government likes to draw attention to this arrangement, because it has been so convenient on both sides. For China, it has helped the regime guide development in the way it would like—and keep the domestic economy’s growth rate from crossing the thin line that separates “unbelievably fast” from “uncontrollably inflationary.” For America, it has meant cheaper iPods, lower interest rates, reduced mortgage payments, a lighter tax burden…The average cash income for Chinese workers in a big factory is about $160 per month. On the farm, it’s a small fraction of that. Most people in China feel they are moving up, but from a very low starting point.

This is the bargain China has made—rather, the one its leaders have imposed on its people. They’ll keep creating new factory jobs, and thus reduce China’s own social tensions and create opportunities for its rural poor. The Chinese will live better year by year, though not as well as they could. And they’ll be protected from the risk of potentially catastrophic hyperinflation, which might undo what the nation’s decades of growth have built. In exchange, the government will hold much of the nation’s wealth in paper assets in the United States, thereby preventing a run on the dollar, shoring up relations between China and America, and sluicing enough cash back into Americans’ hands to let the spending go on.

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Joseph:

PeakTrader, you are seriously confused if you think James Fallows is supporting your view. He is instead criticizing your point of view. The over-valued dollar and trade deficit means that Americans have lower wages and must base their consumption on increasing debt. You think that is a good thing? Consumption based on rising household debt is unsustainable. Do you think that the recent years of painful deleveraging of that household debt have been fun?

The trade deficit occurs because Americans are living above their means through debt. An over-valued dollar suppresses domestic jobs and wages. Don’t you think it would be better to increase jobs and wages so they have the means for consumption instead of debt?

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PeakTrader:

Joseph, you’re still “seriously confused” about the real economy.

We need larger tax cuts and accommodative monetary policy to raise income = GDP = output, and raise income = consumption + saving.

When the output gap closes, and trade deficits increase, tax revenue rises, and taxes can be raised to slow growth to a sustainable rate.

The Japanese yen appreciated from 360 to 100 and the Chinese yuan appreciated 15%, since 2010.

You don’t know if the dollar is really overvalued.

Chart: http://1.bp.blogspot.com/-2KbQDFClYR4/Ujpnhdi9S6I/AAAAAAAAtGo/6qYpd68CttQ/s1600/DXVeryLongTerm0913.PNG

The World’s Reserve Currency
October 3, 2007

“A reserve currency is money that’s held by many countries as their foreign exchange reserves. It’s also the currency that’s typically used to price commodities, such as oil and gold, that are traded between countries.

A country whose currency is the predominant reserve currency benefits tremendously. In the case of the dollar, the U.S. benefits from the increased demand for the dollar that the reserve currency status creates.

Other countries give the U.S. valuable goods in exchange for dollars issued by the Federal Reserve. They also lend the dollars they’ve accumulated back to the U.S. at low interest rates. Most significantly, the U.S. benefits from importing these goods and exporting its inflation to other countries in the form of depreciating dollars.”

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Income Flows from U.S. Foreign Assets and Liabilities
Federal Reserve Bank of New York
November 14, 2012

Foreign investors placed roughly $1.0 trillion in U.S. assets in 2011, pushing the total value of their claims on the United States to $20.6 trillion. Over the same period, U.S. investors placed $0.5 trillion abroad, bringing total U.S. holdings of foreign assets to $16.4 trillion. One might expect that the large gap of -$4.2 trillion between U.S. assets and liabilities would come with a substantial servicing burden. Yet U.S. income receipts easily exceed payments abroad.

As we explain in this post, a key reason is that foreign investments in the United States are weighted toward interest-bearing assets currently paying a low rate of return while U.S. investments abroad are weighted toward multinationals’ foreign operations and other corporate claims earning a much higher rate of return.

U.S. investors earned a much higher rate of return on multinationals’ foreign operations and similar corporate holdings than did foreign investors here, 10.7 percent versus 5.8 percent, respectively.

The superior U.S. rate of return on FDI, as well as the greater tilt in U.S. foreign investments toward FDI, accounts for the $322 billion income surplus recorded in this category in 2011…The United States has earned a substantial premium on FDI investments at least since the 1960s.

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