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China to US: New president? Big deal
November 11, 2008
The timing of China’s fiscal announcement this weekend is notable. It comes just ahead of the White House economic summit of G20 countries. As that meeting approaches, an outgoing US president, a not-yet-US-president, and a lame-duck US Congress are discussing a second stimulus plan costing maybe $100 billion to $200 billion–which might happen before the inauguration, or possibly not. Meanwhile China’s government stuns global markets by promising to inject nearly $600 billion of spending on infrastructure and social welfare this year and next. Supposing the US plan ends up providing $200 billion, that would be roughly 1.5 per cent of US GDP; $600 billion is roughly 15 per cent of China’s GDP. Remind me, which country is taking the lead in managing the global economy?
True, doubts surround the details of China’s proposal. It’s unclear how much of what they are proposing is really additional to existing plans. And of course the timing was not determined entirely by the approaching summit. Figures about to be released are expected to show a sharp deceleration in Chinese growth; announcing a big stimulus in anticipation of this makes sense domestically. Nonetheless, the new initiative–described by Chinese officials as “massive”–sure gives President Hu Jintao something talk about when he meets George Bush later this week. Up to now, the US and the West have been urging China to do more to help stabilise the world economy. Suddenly, China is setting the pace and it is the US and Europe that are dragging their feet. A sign of things to come?
While giving that some thought, here is some useful prep on the summit. Morris Goldstein at the Peterson Institute for International Economics reiterates his “ten-plus-ten” plan with characteristic force and clarity. And in a remarkable feat of timeliness, VoxEU publishes a collection of short and (putting China’s announcement to one side) bang up-to-date essays in an electronic volume edited by Barry Eichengreen and Richard Baldwin, “What G20 leaders must do to stabilise the economy and fix the financial system”. It includes fast accessible pieces by many of the best international-economics and finance scholars in the world, including Willem Buiter, Raghuram Rajan, Dani Rodrik, Michael Spence and others. By the way, my spirits lifted to see Dani, who is usually inclined to pick holes in the orthodox case for open markets on the grounds that it is all so complicated, propose these refreshingly simple-minded phrases for inclusion in the final communique:
The weeks and months ahead will be trying times for economic policymakers everywhere, as they try to contain the fallout for output and employment. Raising trade barriers against imports will be a temptation, especially when currencies fluctuate so much. But the experience with the Great Depression teaches us that this is the surest way to magnify the costs of the crisis, and to spread it to other countries. Hence the most serious challenge for the global trading regime at the present is to ensure that the financial and economic crisis does not lead to a vicious cycle of protectionism, greatly exacerbating the economic downturn.
So we jointly commit ourselves in public to not raising protectionist barriers in response to perceived threats to employment from imports. We further ask the secretariat of the World Trade Organisation to monitor and report unilateral changes in trade policy, with the purpose of “naming and shaming” G20 members that depart from this commitment.
Classic textbook economic policy, a la Keynes. It has not taken China very long to adopt urgent measures aimed at stimulating their economy, and, one must hope, that of the rest of the world. However, whilst the upcoming summit in D.C. is a start, it will most likely take several very long months for there to be any consensus as to what to do about the crisis. As developed nations vie to protect their own interests, developing nations will most surely have to struggle to even have their voice heard. Surely this is an opportunity for all nations, especially the “leading economic powers” to recognize that unless they act together in unison, in the best interests of the all, then any effort will merely end up in more of the same: meeting to meeting to discuss previous meetings results ending nowhere. Let China lead the world and represent the aspirations of the majority of nations who for so long have struggled under the old Bretton Woods regime, for if there is to be reform, it must surely start at the top, stimulated from the bottom.
Posted by: Ian Cairncross | November 11th, 2008 at 12:29 pm | Report this commentI agree with Ian. New regulations on CDs is a good start.
Posted by: Yuliya Sadykova | November 12th, 2008 at 1:31 am | Report this commentIn the context of globalization, no single country can lead the world economy by itself. Many foreign companies are operating in China while exporting to USA and vice versa. Joint effort is very important for nowadays economic policies.
Posted by: Blog Picture | November 12th, 2008 at 2:53 am | Report this commentSir,
While the global economy has become multipolar, in interpreting the significance of developments one might best draw distinctions based on the nature and structure of each country’s economy. In this respect, your response to the question, “which country is managing the global economy?” fails. To wit, compare China — a country with a centrally planned economy, carefully managed by a communist regime — with the United States.
The US has a $14 trillion economy, of which about $3 trillion is government spending (e.g. military, entitlements, discretionary). Any new stimulus plan — be it tax rebates, direct spending on public works programs, or aid to the auto industry — is essentially new spending that didn’t previously exist. When $3 trillion becomes $3.17 trillion, as with the $170 billion (1% of GDP) authorized last summer by the Economic Stimulus Act of 2008, it is significant. It is as if the US is adding more pieces to the economic chess board.
China, on the other hand, is merely moving resources from one region to another. They are not creating more economic activity, putting cash in the hands of consumers, or even increasing their infrastructure plans. Rather than putting more pieces on the chess board, China is merely moving pieces about with the apparent aim of drawing attention, an artless publicity exercise ahead of the G20 summit.
Granted, it is indeed exciting, headline-grabbing stuff when China puts forth announcements of plans to spend $586 billion (16% of GDP), but temper enthusiasm with understanding. To wit, given the centrally planned nature of its economy, China’s stimulus plan is not only a contradiction in terms, but one the markets have quite seen through.
Respectfully yours,
David M. Garrity, CFA
Posted by: David M. Garrity, CFA | November 12th, 2008 at 4:59 am | Report this commentI believe the misunderstanding in Mr. Garrity’s comment lies in his ignorance of economics.
China has made it clear that it intends to increase spending. Thus in aggregate terms there will be a real boost to the economy. For example, the Chinese government can use some of its massive foreign reserves to induce demand in infrastructure projects or health care (rather than buying U.S. Treasurys). This is not a matter of reallocation of resources.
Posted by: Panuwatana Ittigusumaln | November 12th, 2008 at 5:19 am | Report this commentHello, I’m from Indonesia and I just wanted to say that US is sucks. You dragged us with you to the deepest chaos, hopefully China can save us again this time like it did in Asian crisis 10 years ago.
Posted by: Juran | November 12th, 2008 at 5:29 am | Report this commentKeynesian economic policy is manifestly flawed and will offer no long term solutions to the present global financial crisis. Governments the world around cling to Keynesian tenets as justification for maintaining their fiat currency systems which allow them the ‘outrageous privilege’ of inflating the money supply to create an unsustainable facade of increased economic activity which, just incidentally, benefits most those actors in the financial ‘industry’ and concurrently reduces the real value of the governments’ accumulated debts.
The VoxEU publication (link in Clive Crook’s article)is a compilation of current recommendations from a group of eminent economists, mostly associated with the Centre for Economic Policy Research. The report consists of essays on the subject: What G20 leaders must do to stabilise our economy and fix the financial system.
The editors summarize the recommendations in four points:
-Use additional triage to staunch the financial bleeding and fiscal stimulus to get the patient’s heart pumping again.
-Strengthen existing institutions.
-Start thinking outside the box.
-Do no harm.
While the contributors were not unanimous on these points (there were suggestions for new institutions) they were unanimous (one, Ernesto Zedillo, was silent on this, proposing that commitment to conclusion of the Doha round is a necessary goal of the Nov. 15 G20 meeting) on their recommendation of the Keynesian approach. That is, all recommended greater credit creation, precisely the cause of the problem in the first place.
It is most ironic that ‘Start thinking outside of the box’ is listed as a common point made by the contributors, yet their suggestions are all conventional, and all based on bureaucratic ‘planned economy’-type approaches.
Here is some out-of-the box thinking:
Restore the connection between wealth creation and money. Place the creation of money outside of the hands of bureaucrats and financial privateers. Make the ‘cost of money’, i.e. interest, strictly a function of supply of savings vs demand for borrowing. This is a free market fundamental that has not been allowed to exist in our ‘capitalist’ system. The amount of saving needs to correspond to the desire to borrow, and will naturally temper and keep in balance this desire.
The whole notion of borrowing for consumption is shortsighted. By definition this results in drawing tomorrow’s consumption forward to today and adding the carrying cost of the debt incurred. The inescapable consequence is reduced future economic activity. This is clearly the case for the individual consumer who will, as a result of interest payments, end up consuming less in his entire life than if he had deferred the expenditure(s) until it could be fully paid for. This is as true for the nation as for the individual. The only economically healthy borrowing is that related to investment which will result in earnings, ie which will pay for itself.
Once these basic facts are understood, it becomes clear that an enormous change must happen to our economies. There must be a period during which during which the profligate populations must cinch their belts and reduce their consumption to the point that debts can be repaid and healthy savings can be established. These savings must be the sole source of borrowing and thus limit the borrowing, thus eliminate the possibility of future credit bubbles.
Of course, this constraint would eliminate the fraudulent or inherently unstable business practises involving leverage using other people’s money. By and large it would also eliminate hot money, against which so many countries have had to build foreign exchange reserves. All in all, it would result in a dramatic downsizing of hedge fund and derivative-based activity that in practice has been speculative gambling which has added nothing to the real wealth of the world. And if the non-fiat, inherently supply-constrained currency (gold?) was chosen by a majority of nations this commonality would further eliminate the economically unproductive activities associated with foreign exchange. Additionally, unsustainable current account imbalances, with the consequent cries of mercantilistic exchange rate’fixing’, would never grow to the colossal magnitudes we now see in USA vs Japan & China. Furthermore, the need for regulation would also be greatly diminished. Think of the multitudes of economists, bureaucrats and ‘quants’ who could be freed up to do real wealth-producing work!
In today’s world, talk of gold’s limitations as a medium of payment, for example, the inconvenience of coinage and the difficulty of making change, or large purchases, is simply asinine. Transactions would largely be conducted electronically, without the need for physical transfer of the metal. There are already companies providing this service.
Keynesian influences have held sway for nearly 4 generations because they have served the purposes of the ruling and financial elites, in a way that is completely analogous to the astrologer high priests of the Maya, but without their predictive prowess. The wealth of nations has not been optimally nor sustainably promoted by the current systems of fiat money. There is compelling evidence to show that a system based strictly on the ‘barbarous relic’ would be more stable and more productive than one which I hope will soon be in the rear view mirror of history.
Fiat currency leads to easy credit at low interest rates which leads to less saving, more borrowing, more consumption, more imports, bigger current account deficits, more malinvestment, inflated asset prices, etc., etc., until crisis erupts. The crisis is the opportunity for correction, which should involve losses to the people who made the bad decisions. Instead, we typically have the intolerable situation that the real wealth producing sectors of the economy pay the penalty and the men paying the men at the levers further consolidate their hold on the nation, as predicted by Jefferson.
Posted by: Greg Strebel | November 12th, 2008 at 7:09 am | Report this commentChina is using its savings to stimulate the economy while the U.S. is borrowing from others to stimulate the economy. Its a big difference; like someone buying a house with cash vs. someone getting a 100% mortgage, and we know how that ends. But unfortunately for both China and the U.S., the market will have such egotistical gestures for lunch; as they lack strategy, forecasting, and downside protection.
On that note, I hope that the best international-economics and finance scholars in the world are smart enough to focus their efforts on food and energy as opposed to printing more money. You see the greatest economic illusion we face is that money matters more than food and energy. I just hope we don’t find out the reality of it the hard way.
As far as Keynesian economics goes, it will fail if we only use capitalistic resources such as oil, steel, and copper. The trick is to utilize Air, Water and Light; then we are increasing our supply of formerly scarce resources in a new economic system called Pluralism; consistent with Final Equilibrium theories of Jean-Baptiste Say and Leon Walrus among others.
In any case, any such strategy must consider what the global economy will look like in 6 months or a year from now as the investments and “stimulus” are implemented. China, Russia, Middle East as well as other “developing” nations will continue to use or sell their dollar reserves to protect their slowing home turf economies. At the same time, the U.S. will be coming to market with huge debt issuances written on paper backed by the likes of AIG, Fannie and Freddie. As a result, all paper currencies around the world will experience hyper-inflation; while real property prices will be deflating. How can that be? Can you say Stagflation?
So what happens during Stagflation? The world will be seeking a new currency to invest in and trade. One that is not scarce and is infinite in value. A currency that can be universally trusted. Keynesian economics will eventually meet Renewable Energy; and Renewable Energy will win.
Taking into consideration such inevitable outcome will surely help China and the U.S. decide where to invest their last remaining dollars. I just hope they hurry up before our food and energy run out printing so much money.
Posted by: Doug Wolkon at Pluranomics | November 12th, 2008 at 8:52 am | Report this commentsir,
Grammatical Error:
“sure gives President Hu Jintao something talk about when he meets”
Otherwise, enjoyable read and excellent comments.
Mr. Strebel, you fore go to mention the costs and dangers of changing from one system to another.
Regards,
A Nihilist
Posted by: In Light of Nihilism | November 12th, 2008 at 3:30 pm | Report this commentChina’s stimulus package is not going to bail out the global economy. US policy makers are in a good old-fashioned shell game, where is the pea? You thought we were going to do x, well, no we are going to do y. So what happened to x, which purportedly caused the financial crisis? Well, come up with another bailout later to fix that. Get it?
Paulson, et al., are bait and switch artists. This is all just one big Ponzi scheme gone awry and the longer the World gives credibility to (Wall Street) gangersters and two-bit US politicans the deeper the doom and gloom is going to get.
This is an unprecedented crises. That’s what they sold us on. Well is it? Yes, but not for the reasons they gave. Remember the prior bailouts of the airline, S&L and auto industries going back to the 1970s? This time we’re facing multiple crisis far larger than any of those all at one.
The bailout merry-go-round is going to get dizzying. How much will it take in the end?
Don’t forget Paulson just said that the toxic asset problem is on the back burner. America’s socialist-corporate elites are lining up at pigs at the public trough.
By the time the consumer gets bailout out it will be too little, too late. And who’s going to fund our personal and national debt overload with China turning inward?
Posted by: craig | November 12th, 2008 at 7:01 pm | Report this commentChina’s 585 billion dollar Stimulus Package is a Big Deal and really nice indeed…
…so now on Friday in D.C. at the G-20, what will the EU and USA say ? if they really care, they will put a 585 billion dollar plan on the table for Infrastructure and new Jobs, Energy Independence and Jobs ,Health info digital up-grades and Jobs, more Jobs in the fresh salads and for dessert fresh Jobs with strawberries,but when we see how A.I.G. gets 150 billion dollars from the taxpayers and we still don’t know who the “other side of the deal ” is ,we wonder…even when it was AIG the one who started selling mortgage-back securities, credit-default swaps and other mathematical mambo-jambos under the direction of the untouchable ex-CEO Greenberg in 1998 and under the supervision of Greenspan,Rubin,Levitt,Summers ,Emanuel at Wasserstein-Perella and the top darling neocon the one and only Jamie “the wall ” Gorelick at Justice,we wonder…
let’s hope P.Obama and VP. Biden break through and free, and we never see any of these neocons near the taxpayers money again !
Posted by: financialtools1@gmail.com | November 12th, 2008 at 10:34 pm | Report this comment