American Economics Thread

[Blackstone]

The reason for the capital outflows in China and elsewhere in the EM is the idea that the US is going to tighten monetary policies. And the expectation is that the monetary policy in the US is going to "normalize" ie go back to where it was before 2008. That at the moment is obviously not happening. The FED has been talking about this since the summer of 2014. But has since only raised interest rate twice to 0,5% - 0,75%. And has done nothing to build down their balance sheet of 4,5 trillion dollars. All the hot money that flew out of the US during the easing period is now flowing back in again. This has caused inflation to rise but wages in the US remains stagnant. So in other words it is causing stagflation in the US. When the FED says that they are not monetizing the debt they are lying. They say they will allow bonds they hold from the QE programs to mature and that is how they will build down their holdings. But what is happening now is they are recycling the maturing assets in to new purchasing programs. And not just the principles but also the interest as well. In a sense the QE program never ended its just being put on a much lower pitch. Meanwhile in the real world you have massive social upheavel in the US in the form of the largest street demonstrations since the 1960's. You have political upheavel too in the form of Donald Trump an complete political novist running the country lurching from one crisis to another just in his first few weeks. And the economy despite 8 years of on average a trillion dollars a year deficits, trillions of dollars of QE and near 0 interest rate is growing less than 2%. And both productivity and production in the US has been falling for more than a year. Despite all of that the dollar and the Dow Jones are breaking records.

Its all a giant speculative bubble in the US. And it won't end well and will make the 2008 crisis look like a picknick.

China has been less than exemplary too. Instead of capital controls they should have tighten monetary policies. Instead of letting the markets determine the Yuans rate they are aiming for a political rate that helped to burn down their FX reserves.

Another important reason for capital outflow from China is SOEs and private corporations paying down dollar-denominated debt in anticipation of strengthening dollar putting downward pressure on the yuan.

 

[tphuang]

No, China did not "burn up" half a trillion USD reserve just to defend the value of RMB. What you are doing is essentially having a pre-conceived notion, and cherry picking evidence that supports your preconception.

First of all, how do you "burn up" a USD reserve? You sell them. Presumably, you get value from selling them. Since the USD to RMB exchange rate was favorable at the time, China obviously got a pretty good deal from selling its USD reserve.

Second, what do you think China did with the money from selling their foreign reserves? Building infrastructure and making investments. China has multiple large projects going on, from the AIIB to the New Silk Road, all of which require a lot of cash.

You are focusing on the USD/RMB exchange rate because it directly affects the trade imbalance between US and China. While there's nothing wrong in that, it would be a mistake to think that the Chinese are focused on the same thing that you are. While exchange rate stability is certainly nice to have, I would argue the Chinese are far more focused on their Big Projects.

In fact, ask yourself this question: why did China build up such a large reserve in the first place?

If you don't like what I'm saying, argue against it rather than saying I have preconceptions or doing cherry-picking. I don't care about trade balance and only brought up currency exchange rate and currency reserves because I wanted to explain something that I feel most people are mistaken about.

One of the main uses for currency reserve is for a central bank to defend the value of its currency or maintain currency stability. In most recent times, Swiss national bank was doing that to prevent EUR/CHF from going below 1.1 until it gave up on that effort. In the past, many central banks have used up most of their reserves defending their currency.

You don't loose $500 billion of reserve in 6 months because you have large projects. China had plenty of large projects back in the days that it was accumulating all the reserves. All the domestic projects and projects involving Chinese labour are paid for in CNY, why would they need to sell USD for that?

Do you know what CFFET is? Have you ever looked at intraday rates of USD/CNH on EBS vs what the onshore exchange rates are going at? China is still running a huge surplus. Where does the extra foreign currency go? What does it mean when a currency drops vs another currency? Why does China put in extra capital control?

 

[tphuang]

There's a theme when reporting on China's economy and it always revolves around how China is spiraling out of control of itself. It cannot mange itself hence continuing the idea that following the Western way of doing things is what's best. Is it true that China is propping up the Yuan by burning through FX reserves? Maybe, but then they also said many times before China was trying to keep the Yuan down. That's what Trump believes. This is a new one that China is propping the Yuan up. The same contradictions with growth rates. I just read an article yesterday that it isn't just China that's selling off their FX reserves. One can say the world has no confidence in the US hence the Fed says they see raising interests rates ahead as reported separately today. Signs of dire things to come but they're not going to report it that way.

I would say that Chinese central bank tries to maintain currency stability because it's good for economy and trade to have stable currency. Companies can operate much more peacefully when you have certain costs and not a lot of currency risks to worry about.

 

[solarz]

If you don't like what I'm saying, argue against it rather than saying I have preconceptions or doing cherry-picking. I don't care about trade balance and only brought up currency exchange rate and currency reserves because I wanted to explain something that I feel most people are mistaken about.

One of the main uses for currency reserve is for a central bank to defend the value of its currency or maintain currency stability. In most recent times, Swiss national bank was doing that to prevent EUR/CHF from going below 1.1 until it gave up on that effort. In the past, many central banks have used up most of their reserves defending their currency.

You don't loose $500 billion of reserve in 6 months because you have large projects. China had plenty of large projects back in the days that it was accumulating all the reserves. All the domestic projects and projects involving Chinese labour are paid for in CNY, why would they need to sell USD for that?

Do you know what CFFET is? Have you ever looked at intraday rates of USD/CNH on EBS vs what the onshore exchange rates are going at? China is still running a huge surplus. Where does the extra foreign currency go? What does it mean when a currency drops vs another currency? Why does China put in extra capital control?

Again, what does it mean to "lose $500 billion of reserve"? Where does the money go? That's the real question, isn't it?

The New Silk Road and the AIIB aren't exactly domestic projects.

 

[Miragedriver]

This is not about the American economy, but since all the world economies are becoming interrelated it is relevant. Very interesting.

At the heart of the European debt crisis is the euro, the currency that tied together 18 countries in an intimate manner. So when one country teeters on the brink of.

 

[advill]

I am reading "China's Future" a book by Prof David Shambaugh, a distinguished & well known academic of George Washington University. He is an old China Hand (I believe since 1990s) and has been to China several times at the invitation of Chinese Universities. I reckoned he also speaks Mandarin. I met him recently in Singapore during a talk he gave. He is respected and generally fair & objective in his views (governance, politics, economics etc.) on China. A 190+ pages book giving some useful insights. This book was published last year 2016 - (politybooks.dot com website for more info). I usually read and listen to both sides of useful stories, & keep and open mind like all sensible/practical consultants/academics/professionals should do. Incidentally, I found a very interesting quote by the Chinese Sage Li Gang relevant to President Trump: "If you don't understand tact, speak rudely, interact with people without manners, and behave inappropriately, you will lose people's friendship and fail in whatever mission you attempt".

 

[Blackstone]

I am reading "China's Future" a book by Prof David Shambaugh, a distinguished & well known academic of George Washington University. He is an old China Hand (I believe since 1990s) and has been to China several times at the invitation of Chinese Universities. I reckoned he also speaks Mandarin. I met him recently in Singapore during a talk he gave. He is respected and generally fair & objective in his views (governance, politics, economics etc.) on China. A 190+ pages book giving some useful insights. This book was published last year 2016 - (politybooks.dot com website for more info). I usually read and listen to both sides of useful stories, & keep and open mind like all sensible/practical consultants/academics/professionals should do. Incidentally, I found a very interesting quote by the Chinese Sage Li Gang relevant to President Trump: "If you don't understand tact, speak rudely, interact with people without manners, and behave inappropriately, you will lose people's friendship and fail in whatever mission you attempt".

I like Shambaugh, read his work, buy some of his books, and watch his video presentations often. He is generally insightful and balanced, but like most Westerners, he can't overcome viewing China through western glasses and put way too much emphasis on "democracy," "human rights," and "freedom of the press." Therefore, I see him as myopic and lacks historical perspective on economic developments of US and other wealthy western countries, plus Japan, RoK, Singapore, and Taiwan Province.

All successful countries since the UK-lead Industrial Revolution completed economic and industrial developments while still more or less undemocratic, socially unjust, with forms of authoritarian governance. They only embarked on massive social and political reforms after completing development, and building great institutions to run their countries. It's a national development model that has stood the test of time.

On the flip side, countries that democratized before completing economic and industrial developments are basket cases. Bush43 imposed democracy on Afghanistan and Iraq, with copious media coverage showing cheerful people with purple ink on their fingers. How did that turn out? India, post-Soviet Russia, and Brazil are monuments to the folly of democratizing before competing national developments.

Sadly, most Western China watchers I've come across, even ones that aren't generally hostile to China, are of the David Shambaugh and Winston Lord types who apparently think the India/Russia/Brazil model is better than the US/JPN/Taiwan model. From that, I conclude they either lack historical knowledge or are irrational.

 

[taxiya]

As Karl Marx has pointed out long ago, (his study based on other thinkers before him), economy is the material foundation of any and every social institutions built on top of it. The examples of west and east-Asian countries are all proofs of Marx's thesis, economy development made the social institution (democracy being one of many) possible. There is no exception in the whole human history says otherwise so far and never will be if I dare to say.

Regardless one's personal feeling of Marxism, one has to agree to his core tenant "materialism". In my own layman's words "one can only eat what one can grow in his own farm".

 

[solarz]

As Karl Marx has pointed out long ago, (his study based on other thinkers before him), economy is the material foundation of any and every social institutions built on top of it. The examples of west and east-Asian countries are all proofs of Marx's thesis, economy development made the social institution (democracy being one of many) possible. There is no exception in the whole human history says otherwise so far and never will be if I dare to say.

Regardless one's personal feeling of Marxism, one has to agree to his core tenant "materialism". In my own layman's words "one can only eat what one can grow in his own farm".

Pretty much this. Civilization began when humans started practicing agriculture and began to have surplus.

 

[AssassinsMace]

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I'm no expert on economics and I've been arguing this point forever and go even further. People want things explained to them simple. That's why they believe in the lies about trade. If they think something says "Made in China," it's 100% Chinese and China makes all the money when sold to consumers. Where are all the Chinese brands on US store shelves? I don't see hardly any except if you go to cheap low-end dollar stores. Trinkets and cheap plastic toys aren't the source of the so-called "trade imbalance." The majority of what is said to be made in China are foreign corporations outsourcing labor to make their products for them. They're the ones that make all the profits when those items are sold to consumers but it's consider 100% a Chinese export. This article continues with the mistake of using language people aren't going to understand. Of course there are many Americans using the trade lies and are just out to punish the world for their perceived lack of respect to the US. They can't do that if it's known that US corporations are the primary benefactors on the lies about trade and not countries jobs are outsourced to. Why would they outsource jobs if they weren't making even more money than they would manufacturing in the US? Hence the lie that people believe foreigners are pointing guns to Americans' heads forcing them to send jobs to their countries. These are the lies of the establishment to cover-up how they're the ones that make all the money and to distract Americans from changing the system where they benefit the most by blaming it on foreigners.

Why is Trump a bad President that even the establishment doesn't like despite how he perpetuates their lies? It's because Trump, who's a believer in those lies, is in a position to act against countries based on those lies which disrupts the system that enriches the establishment. Their costs are going to go up having to manufacture in the US. Blame it on the foreigner instead of Congress who can just simply pass a law that bans outsourcing than going through the motion of separately pushing each foreign country where jobs are outsourced to end it. Those in Congress are protecting the status quo because they too need to prevent American voters from blaming them for not doing anything thus perpetuating the lies that it always a foreigner victimizing America.

The last time China was labeled a currency manipulator was back during the Clinton Administration when China wasn't a big economic force in the world. Currency manipulation keeps US corporations' costs for outsourcing low. Slap tariffs and it's the US corporation that outsources that pays it not China. That's why Congress talks big about punishing China but they never pull the trigger. All because they lie about trade. That's why you see a lot of news contradictions where before Trump, they were for punishing China because of trade where today they're in panic that Trump might actually do something about it.