Archive for the ‘China’ Category

I COMPLETELY agree with the points made by Bill Gross in this article.  Here is an excerpt and the link:

“Faced with these two decidedly different routes to “level the playing field” it seems obvious that the United States is opting for “Easy Street” as opposed to “Buckle Down Road.” Granted, “The Ben Bernank” as a YouTube cartoon rather hilariously labeled him, has for several months importuned Congress and the Executive Branch to institute substantive reforms, while he attempts to keep the patient alive via non-conventional monetary policy. But very few others are willing to extract their heads from the sand. The President’s debt commission with its insistence on low personal and corporate income tax rates and a mere 15 cent increase in the gasoline tax was one example. The Republicans’ reluctance to advance detailed ideas for budget balancing is another. And the Democrats’ two-year focus on the biggest entitlement program since Social Security – healthcare – as opposed to fundamental reforms to counter our lack of global competitiveness – is perhaps the most grievous example of lost opportunity. Unlike the United Kingdom, where Prime Minister Cameron has championed fiscal conservatism, or even Euroland, which is being forced in the direction of Angela Merkel’s Germanic work ethic, the United States seems to acknowledge no bounds to what it can spend to bolster consumption or how much it can print to support its asset markets. We will more than likely continue to “level the playing field” via currency devaluation and an increasing emphasis on trade barriers and immigration, as opposed to constructive policies to make this country more competitive in the global marketplace.”



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Stiglitz presents a very different perspective on US-China trade:


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I thought this Economist article contained an interesting combination of ideas.  First, it’s astonishing to note that although the level of our trade deficit with China has decreased, over the same period, our trade with China has grown to represent a greater portion of our total trade deficit.  The article presents several plausible explanations of why China’s share of global exports is rising but I am left wondering why the US/China trade relationship has changed so dramatically.

Even more interesting to me is Paul Krugman’s endorsement of currency-adjusting tarriffs as an appropriate response to Beijing’s stubbornly pegged Yuan.  Although I strongly believe China’s subsidized currency has created massive damaging distortions in world trade and capital flows, which are disturbingly ignored in Washington as senators seemingly prefer berating Wall Street “barons” to seeking actual cause,  it is ironic to me that Krugman, the borrow and stimulate Keynesian, doesn’t seem to realize that trade is a two way street.  America has completely lost touch with the reality that wealth is created through parsimony and hard work.  As much as I agree with Krugman’s diagnosis, Greenspan is also on board in spirit (see Greenspan’s March 2009 WSJ piece), I wish Krugman would recognize his part in the problem.

‘China takes an even bigger slice of America’s market. In the first ten months of 2009 America imported 15% less from China than in the same period of 2008, but its imports from the rest of the world fell by 33%, lifting China’s market share to a record 19%. So although America’s trade deficit with China narrowed, China now accounts for almost half of America’s total deficit, up from less than one-third in 2008.

Foreign hostility to China’s export dominance is growing. Paul Krugman, the winner of the 2008 Nobel economics prize, wrote recently in the New York Times that by holding down its currency to support exports, China “drains much-needed demand away from a depressed world economy”. He argued that countries that are victims of Chinese mercantilism may be right to take protectionist action.

Some forecasters, such as the IMF, expect China’s trade surplus to start widening again this year unless the government makes bold policy changes, such as revaluing the yuan. However, Chris Wood, an analyst at CLSA, a brokerage, argues that China is doing more for global rebalancing than America. Rebalancing requires that China spends more and America saves more. Mr Wood argues that China is doing more to boost domestic consumption (for example, through incentives to stimulate purchases of cars and consumer durables, and increased health-care spending) than America is doing to boost its saving. America’s total saving rate fell in the third quarter of last year to only 10% of GDP, barely half its level a decade ago. Households saved more, but this was more than offset by increased government “dissaving”.’


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More interviews with Soros on the FT’s website:


Also in today’s headlines, Soros ‘has pledged $50m to back a new think-tank with the mission of reconceiving the field of economics, which he describes as “a dogma whose time has passed”.

The group, to be called the Institute of New Economic Thinking, will gather luminaries in the field of economics to reflect on the ideas that allowed the latest economic crisis to transpire and to bring new ideas to a profession that some argue has become too deeply entrenched in free-market ideology.

The group’s advisory board will be studded with economists such as Jeffrey Sachs, George Akerlof, Kenneth Rogoff and Joseph Stiglitz as well as public commentators such as Anatole Kaletsky and John Kay, a Financial Times columnist. Mr Soros is pledging $5m a year for 10 years.

Mr Soros, who has long been a critic of economic “fundamentalism”, blames the unwavering belief in unchecked free markets, which remains pervasive in universities, for allowing financial markets and asset prices to melt down. Through INET, he will be indirectly funding his philosophy of“reflexivity” – that markets tend to influence perceptions of reality, which in turn feed back into markets.

“The ideologists in the free markets are still in command and I think they’ll be very difficult to remove because they have tenure,” Mr Soros said in an interview with the Financial Times.

A side-effect of the crisis has been a deep bout of self-doubt in the economics profession, which largely failed to predict the downturn. Even Alan Greenspan, one of the most faithful believers in the efficiency of markets, said he had found a “flaw” in the free-market model that defined his world view.

“The financial crisis has caused a moment of deep reflection in the economics profession, for it has put many long-standing ideas to the test,” Mr Stiglitz, winner of the 2001 Nobel prize in economics, said in a statement. “If science is defined by its ability to forecast the future, the failure of much of the economics profession to see the crisis coming should be a cause of great concern.”

Mr Soros, who has called for limits on risk, leverage and compensation at big banks, said he realises it will be difficult to uproot the predominant strain of economic thinking. He hopes, however, to inspire a groundswell of support from students that will “shift demand” at universities to include economic ideas that are more reality based and less focused on rigid mathematical models.

“I think that the financial crisis has proven that is unrealistic,” Mr Soros said of the prevailing economics literature, which assumes that people behave rationally. “The dogma has lost touch with reality.”

INET will fund research, fellowships and workshops aimed at explaining the flaws in the current financial system.’


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I have read many articles recently focused on executive pay and our “bloated” financial sector with a tone similar to that taken by Stiglitz in the excerpt below.  While I agree that our economy hardly awards pay in line with productivity, this allocation of blame forgets that many many of this country’s citizens leveraged themselves to hilt with loans from credit cards and multiple mortgages.  The national savings rate was briefly negative.  I’ve heard the stories of deceptive subprime mortgage salesman with disgusting incentives, but it still takes two to tango.  I place at least as much responsibility on the “less informed” for their poor choices as I do the misinformation of snake oil salesmen.  That said, our banks need to take a long pause to consider their longterm role in society and act appropriately.  Goldman would be very foolish to declare even near record bonuses this year.

Without any other compass, the incentive structures they adopted did motivate them – not to introduce new products to improve ordinary people’ lives or to help them manage the risks they faced, but to put the global economy at risk by engaging in short-sighted and greedy behavior. Their innovations focused on circumventing accounting and financial regulations designed to ensure transparency, efficiency, and stability, and to prevent the exploitation of the less informed.

There is also a deeper point in this contrast: our societies tolerate inequalities because they are viewed to be socially useful; it is the price we pay for having incentives that motivate people to act in ways that promote societal well-being. Neoclassical economic theory, which has dominated in the West for a century, holds that each individual’s compensation reflects his marginal social contribution – what he adds to society. By doing well, it is argued, people do good.

But Borlaug and our bankers refute that theory. If neoclassical theory were correct, Borlaug would have been among the wealthiest men in the world, while our bankers would have been lining up at soup kitchens.

Of course, there is a grain of truth in neoclassical theory; if there weren’t, it probably wouldn’t have survived as long as it has (though bad ideas often survive in economics remarkably well). Nevertheless, the simplistic economics of the eighteenth and nineteenth centuries, when neoclassical theories arose, are wholly unsuited to twenty-first-century economies. In large corporations, it is often difficult to ascertain the contribution of any individual. Such corporations are rife with “agency” problems: while decision-makers (CEO’s) are supposed to act on behalf of their shareholders, they have enormous discretion to advance their own interests – and they often do.

Bank officers may have walked away with hundreds of millions of dollars, but everyone else in our society – shareholders, bondholders, taxpayers, homeowners, workers – suffered. Their investors are too often pension funds, which also face an agency problem, because their executives make decisions on behalf of others. In such a world, private and social interests often diverge, as we have seen so dramatically in this crisis.

Does anyone really believe that America’s bank officers suddenly became so much more productive, relative to everyone else in society, that they deserve the huge compensation increases they have received in recent years? Does anyone really believe that America’s CEO’s are that much more productive than those in other countries, where compensation is more modest?

Worse, in America stock options became a preferred form of compensation – often worth more than an executive’s base pay. Stock options reward executives generously even when shares rise because of a price bubble – and even when comparable firms’ shares are performing better. Not surprisingly, stock options create strong incentives for short-sighted and excessively risky behavior, as well as for “creative accounting,” which executives throughout the economy perfected with off-balance-sheet shenanigans.”

On the other hand, I am very happy to see that political powers have begun  to acknowledge the continuing threat of global trade imbalances to the economy and, to a lesser extent, their role in the crisis we are exiting.

“U.S. Federal Reserve Chairman Ben Bernanke warned on Monday that Asian export-promotion policies and large U.S. budget deficits could refuel global economic imbalances and put efforts to achieve more durable growth at risk if not curbed.” http://www.nytimes.com/reuters/2009/10/19/business/business-us-usa-fed-bernanke.html

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“Beijing will use its foreign exchange reserves, the largest in the world, to support and accelerate overseas expansion and acquisitions by Chinese companies, Wen Jiabao, the country’s premier, said in comments published on Tuesday.”

“The “going out” strategy is a slogan for encouraging investment and acquisitions abroad, particularly by big state-owned industrial groups such as PetroChina, Chinalco, China Telecom and Bank of China.”

‘In an interview published in state-controlled media, the chairman of China Development Bank said Chinese outbound investment would accelerate but should focus on resource-rich developing economies.

‘“Everyone is saying we should go to the western markets to scoop up [underpriced assets],” said Chen Yuan. “I think we should not go to America’s Wall Street, but should look more to places with natural and energy resources.”’


Apparently China feels that it’s currency peg is less threatened as the fall of the Thai Bhat fades into the past and their reserves continue to bloat.  Hopefully their new found confidence will lead to a more free floating Renminbi soon.

I’m also starting to smell a shift.  As the Chinese continue to gobble up the worlds natural resources, a shift from China the producer to China the consumer can’t be more than a generation away.

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