US Financial Crisis/Bailout, China's Role

pla101prc said:

ummm isnt that a bit of an overstatement? sure China is doing well and japan is recovering and all that, but the most optimistic estimate would put your YY order maybe beyond 2050...which is when China is prolly gonna surpass the Unite States as the largest economic power.

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I don't blame you. I don't because you're a product of your environment. Western universities (and the Japanese too) make sure their graduates know absolutely nothing about economics by the time they graduate, all the more so if they're economic majors.

I'll just leave you the hint that America's so called GDP is not based on how "strong" its ecnomy is, but how "fat" it is. Given that, the larger the nubmer, the more damned the economy is.

The rest, you'll have either dig on your own or make an appointment with me.

When it hits the fan, it will really be something this time... wish you guys the best.

Schumacher said:

According to PPP, China will be the largest in about 10 yrs. The current mayhem may bring some changes to this estimate & I suspect it may be actually to bring the time a little closer.

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"...In 2008 it is almost certain to overtake Germany as the world's largest exporter, and assuming recent rates of growth are sustained, within ten years it will overtake America (in PPP terms) as the world's largest economy....."

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yes Chinese economy is 60% of the US in terms of the purchasing power parity. however, as an economy grow the price level will go up, so the PPP isnt increasing as fast as the actual GDP(of course the american PPP has been having a 0 growth rate for a while now). so even by most optimistic estimate it'd be at least another 20 years before China can catch up in terms of PPP (because China cant always sustain this kind of growth rate). and you have to consider the "quality" aspect of this too such as technology and stuff. so overall yeah its still gonna take a while.

I posted this elsewhere earlier today.

As I understand it, the basic Chinese Strategy is to maintain activity in the Global economy by concentrating on Infrastructure and other aspects of Development in the Interior as well as boosting individual consumption. Theis means China is planning a switch from a Supply led to a Demand led economy.

The main effect of this will be to put a floor under Global Commodity prices, by ensuring that Chinese demand for, energy, Raw Materials and Food exports remain strong.

What you will notice about this strategy, is that the main benficiaries are other developing countries, both regional and Global. In this way China will be able to play the "significant role" promised by Premier Wen but without passing the benefit directly to Western economies or Institutions. Moreover, with ongoign activity and trade, Chinese Banks will be able to perform the Lending activities in these countries that the US banks would have formally monopolised and Chinese companies, with both Cash and access to strong credit lines, will be able to buy local assets and companies to consolidate the global positions and supply.

The point of this is that China will be able to perform a strong stabilisation role and develop its own Financial System, simply by persuing its bottom line interest and keeping it promises. If the Western economies wnat direct Chinese assistance they will need to agree to Chinese terms and basically make it worthwhile.

The choice offered to the West is stark: either agree and become subsidiary players to a new Chinese Economic order or disagree and watch China build the new order anyway in which they will excluded and unable to resist while they have to put their banking systems and public finances back in order over many, many years!

pla101prc said:

yes Chinese economy is 60% of the US in terms of the purchasing power parity. however, as an economy grow the price level will go up, so the PPP isnt increasing as fast as the actual GDP(of course the american PPP has been having a 0 growth rate for a while now). so even by most optimistic estimate it'd be at least another 20 years before China can catch up in terms of PPP (because China cant always sustain this kind of growth rate). and you have to consider the "quality" aspect of this too such as technology and stuff. so overall yeah its still gonna take a while.

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The price level goes up but that is also due to inflation. For example the US economy has grown since 2000, but since that time, the US dollar has also lost 40% of its value. This is one reason why I think using GDP as a figure can be so distorting.

PPP factors the prices of domestic products. However, imported products are still bought by the dollar. So the cost of obtaining imports is still the same as everyone else.

But...but...it can also be said that the Yuan is deliberately undervalued, and the size of China's foreign reserves also gives them the edge in obtaining these imports because they simply have the most money for it.

GDP does not necessarily mean wealth creation when

1.) GDP counts all forms of consumption, including those financed by debt.

2.) GDP counts much of government spending, including military spending.

3.) GDP subtracts the cost of imports but it still counts the sale of that import within the country as GDP. If the import cost of a DVD player from China is $25 and it is sold in Walmart for $50, then you have net $25 to add to the GDP.

4.) GDP counts spending, consumption and investment. However, spending and consumption is simply not investment, which means these are not income generating.

SampanViking said:

I posted this elsewhere earlier today.

As I understand it, the basic Chinese Strategy is to maintain activity in the Global economy by concentrating on Infrastructure and other aspects of Development in the Interior as well as boosting individual consumption. Theis means China is planning a switch from a Supply led to a Demand led economy.

The main effect of this will be to put a floor under Global Commodity prices, by ensuring that Chinese demand for, energy, Raw Materials and Food exports remain strong.

What you will notice about this strategy, is that the main benficiaries are other developing countries, both regional and Global. In this way China will be able to play the "significant role" promised by Premier Wen but without passing the benefit directly to Western economies or Institutions. Moreover, with ongoign activity and trade, Chinese Banks will be able to perform the Lending activities in these countries that the US banks would have formally monopolised and Chinese companies, with both Cash and access to strong credit lines, will be able to buy local assets and companies to consolidate the global positions and supply.

The point of this is that China will be able to perform a strong stabilisation role and develop its own Financial System, simply by persuing its bottom line interest and keeping it promises. If the Western economies wnat direct Chinese assistance they will need to agree to Chinese terms and basically make it worthwhile.

The choice offered to the West is stark: either agree and become subsidiary players to a new Chinese Economic order or disagree and watch China build the new order anyway in which they will excluded and unable to resist while they have to put their banking systems and public finances back in order over many, many years!

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well first of all i think its still a lil early to talk about this new economic order. yes yes EVENTUALLY China will become a prominent actor in global economy, but not for another few decades. that was my main point. second of all, for the switching to demand led economy thing, the Chinese economists has been talkin about that for quite a while. but China is a long way from getting its ppl to change their spending habits, its a tradition that's been there for thousands of years and even myself livin in Canada still feel uncomfortable to have anything less than $1000 in my bank account (i am a student so i dont make that much on a part-time job). and some of the potential wallet killers like health care, housing, and school only further discourage the Chinese ppl from spending more. maybe in the long run consumption level will gradually increase but in the short term the best way is to increase government spending.

An economy based on spending rather than saving is exactly what caused the US economy to tank in the long run.

lol well for the past several decades they've been enjoying the luxury that they didnt really earn...you gotta pay back sooner or later =D

There are a lot of serious discussions on economic issues raging in many forums and blogs all across the Internet right now.

We as a globe and as a species, need to redefine and rethink all our concepts of economics. No more of that communist/socialist/capitalist/freemarket BS. We cannot think or plan of economics in political and ideological terms, e.g. attach any economic behavior with a slogan being capitalistic or socialistic. Screw everyone from Marx to Keynes to Friedman. Our entire belief and concept system of economics simply has to change.

The concept of free markets as a means of responsive (fast) and responsible (fair) self regulation is in paper, correct in theory. It mimics the self regulatory behavior that exists in all natural ecosystems.

The inherent flaw of such a concept is that with being free, you are also free to create systems, instruments, devices, means of measurements and feedback, that can also distort their self correction process. In other words, you create infrastructure that prevents this self correction from happening. Because of stuff like CDS, and fancy worded bonds no one can really understand, banks were lending ad infinitum with no stop. How can banks lend money with no stop?

The Federal rule is this. A bank can lend 10x of the amount it holds as deposits.

So if someone deposits 100 dollars to the bank, the bank can lend out 1000 dollars to someone else.

Now what if that someone else deposits 100 dollars out of the 1000 that he was lent. Guess what, the bank takes that 100 dollars and lends out another 1000 to someone else. Then that someone deposits a hundred again...

And this goes on and on like a nuclear fission reaction.

That's how money is made in paper infinitely. Its possible all this can be done electronically; the Feds don't even have to print out paper.

It is impossible for a guy in the 18th Century like Adam Smith to conceive an economic system that is able to anticipate genius traders, speculators, and bankers with their Internet connected computers, bonds, swaps and credit cards.

When I read and study these economic debates, why do people still refer to the ideologies and economic ideas of people who live so long time ago and has no idea ever of the Internet?

crobato said:

So if someone deposits 100 dollars to the bank, the bank can lend out 1000 dollars to someone else.

Now what if that someone else deposits 100 dollars out of the 1000 that he was lent. Guess what, the bank takes that 100 dollars and lends out another 1000 to someone else. Then that someone deposits a hundred again...

And this goes on and on like a nuclear fission reaction.

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That is an inaccurate and highly distorted description of the fractional reserve system.

When someone deposits $100, the bank doesn't lend out $1000. The bank lends out only a fraction of it, say 90%. Assuming there's only one bank, the $90 lend out eventually have to come back to the same bank as $90 deposit. The bank can then lend out 90% of the $90 deposite and so on. However, the bank must first receive the deposit to be able to lend anything out. I'm sure you know this already.

What banks earn are the monthly interests, which slowly accumulate in the banks' account books. The banks always have the risks of losing the money they lend out, so they have to scrutunize the borrower. Problem began when some smart-ass thought of the idea of selling debts, and thereby "transferring" the risks to the investors. The money that was lend out got covered immediately, the banks now earn interests with "no risks", and there are no more incentive to scrutunize the borrowers. More smart-ass caught on and specialize in lending out other people's money, and a lot of money grew out of thin-paper.

Part of how the RMB is undervalued is that BoC sells Yuan at a cheap price and takes up the foreign currency. So part of the value of the yuan is being hoarded by the BoC in the form of foreign reserves. You can say that the BoC is stealing/taxing every Chinese and putting it in a big war chest...