US Financial Crisis/Bailout, China's Role

pla101prc said:

no that's in fact not true, yes there are always more than enough competent individuals, but even these ppl, when they go up the rank they'll become corrupted. i've seen too many of those.

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Correct me if I am wrong, but I was under the assumption that they have to be corrupted to be able to climb up the rank ladder, not the other way around.

pla101prc said:

its not the individuals that are corrupted, its the system that is corrupted.

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Actually, this exact thought had occured to me, but thinking about it a bit more it just doesn't make sense. The system is dead, whereas people are live. For this reason, people can always find means to beat the system, and this is especially true in China.

I guess this is a real catch-22 situation: you need to bring in new mechanisms and people to remove corruption, but doing so would subject the mechanisms and new people to contamination by corruption, so corruption won't actually get reduced. On the other hand, the corruption situation is so serious that you can't afford not to do anything about it.

Engineer said:

Correct me if I am wrong, but I was under the assumption that they have to be corrupted to be able to climb up the rank ladder, not the other way around.



Actually, this exact thought had occured to me, but thinking about it a bit more it just doesn't make sense. The system is dead, whereas people are live. For this reason, people can always find means to beat the system, and this is especially true in China.

I guess this is a real catch-22 situation: you need to bring in new mechanisms and people to remove corruption, but doing so would subject the mechanisms and new people to contamination by corruption, so corruption won't actually get reduced. On the other hand, the corruption situation is so serious that you can't afford not to do anything about it.

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lol you have to be an official first to "corrupt yourself". your start by becoming a civil servant or something that is really low ranked and work your way up. but at this point most ppl arent rich enough to bribe nor powerful enough to embezzle. and higher ups too want to employ ppl that are good at what they are doing.
and yeah i'll have to admit that there isnt anything that i or anyone i know can think of that will even temporarily reduce corruption. except for of course you have an extremely hardcore emperor like YinZhen or Zhu Yuanzhang or even Mao. but even that can only be achieved under the precondition that either the economy and society is stable (Yinzhen)or you have an ultra-powerful and competent emperor (Zhu Yuanzhang and Mao), since neither is the case at the moment i'll say the only thing you can do is periodically catch a few guys and gradually restructure the entire system, not just political structure.

The Gubernator's state about to be gubernated.


California running out of money
By Ben Arnoldy Ben Arnoldy Wed Dec 10, 3:00 am ET

Sacramento, Calif. – California lawmakers just got a Henry Paulson-like ultimatum from state officials: If they don't act, the state could be forced to suspend road, bridge, and other public-works projects as early as next week. Come March, California will be out of cash for even day-to-day operations.

A confluence of the national recession and years of legislative budget games is squeezing the Golden State as never before. Although it's not the largest budget gap the state has ever faced, this time it will be harder for California to get help from private lenders. Standard & Poor's now ranks it lower than any other state except Louisiana, which shares the same rating.

The question is: Will lawmakers finally make the tough budget decisions they've put off for so long?

"Because California does have a perennial budget crisis, it's very easy to fall into the 'boy who cried wolf' syndrome," says Dan Schnur, director of the Jesse M. Unruh Institute of Politics at the University of Southern California. "This time the sky is really falling."

The state faces a $28 billion budget shortfall over the next two years. If nothing is done, nearly $5 billion in public-works projects could be halted in little more than a week for lack of bond sales – everything from bridge replacements to a new highway tunnel and billions of dollars' worth of school construction, according to state Treasurer Bill Lockyer.

Already, the state failed to attract enough buyers three weeks ago to sell all of the bonds it had floated, he told state lawmakers Monday. "Expecting investors to purchase our bonds now, when we can't agree on a budget that lenders can rely on, is like expecting someone to buy a stock when they know it's losing value," said Mr. Lockyer.

He and three other state finance officials testified Monday in a rare joint session of the legislature.

The picture worsens next spring if legislators don't pass some plan to increase revenues or cut spending or both. California will run out of operating cash in March, state controller John Chiang told the lawmakers. The recession has severely squeezed state tax revenues.

Normally, the state would borrow to cover any shortfall. But internal revenue sources have already been depleted and outside lenders are less accommodating.

"It's not because of [California's] economy, because it's deep and diverse," says David Hitchcock, primary credit analyst for California with Standard & Poor's. "It's because, financially, they've had budgets that have not proved realistic. They've had large deficits and they've only been able to pay for their budgets through borrowing for the last couple years."

Mr. Chiang said the state may be forced to seek special loans at exorbitant rates or issue IOUs to state workers and vendors, further damaging the California economy.

"Failure is not an option here," said Chiang, referring to the need to align state spending and revenues. "It would take years to recover ... deepening and prolonging the recession."

Bringing the budget back in line will require drastic cuts, significant tax raises, or both. Those options will harm the economy in the short run and cost the state jobs – but so would any delay in taking action, said legislative analyst Mac Taylor.

Not fixing the budget would worsen the state's credit rating, making infrastructure projects even harder to fund.

"It means that the stimulus that we all want won't occur," Lockyer said. "Millions of dollars that would have gone to thousands of private-sector businesses, creating tens of thousands of jobs, will be cut off."

Other states are stuck in similar positions of budget duress, making federal money key to jump-starting their economies, says Stephen Levy, director and senior economist at the Center for the Continuing Study of the California Economy.

Washington could also help California by backstopping state and local bonds with a federal guarantee. That would reassure investors, preventing the freeze-up in infrastructure projects. It would almost certainly cost the federal government nothing, says Mr. Levy. President-elect Obama hasn't advocated this yet, he adds, but his advisers are discussing the option.

Even with federal guarantees for bonds, lawmakers in Sacramento would still have to tackle the budget deficit, notes Levy.

During the joint session, members listened attentively, but their questions and statements afterward didn't reveal much softening of positions. Republicans signaled continued opposition to tax raises, while Democrats stressed they had already countenanced "devastating spending cuts" and some new revenue was needed. Democrats are a few seats shy of a full two-thirds majority needed to pass a budget on their own.

"It's not clear what my colleagues on the other side of the aisle want," said Karen Bass (D), speaker of the state Assembly, who helped organize Monday's joint session.

"I didn't hear anything that was new today," says Sen. Jeff Denham (R). "People around the state would expect us to deal with all of the waste first, get rid of all the bells and whistles."

To that end, he's proposing eliminating a $2 million waste-management board and supports selling state property, like San Quentin prison. He would close tax loopholes but wouldn't name any taxes he thought Republicans would be willing to raise.

"My guess is you can find a small number of Republican votes for additional taxes if there is a trade-off for some job and business incentives," says Mr. Schnur. Possible incentives include scrapping stringent 40-hour workweek regulations and scaling back on the state's ambitious greenhouse-gas targets, he says.

Had the following exchanges with Brad Setzer of Council of Foreign Relations on his blog and another poster:

me said:

Brad,

I just recently found your blog. Great stuff.

Correct me if I’m wrong but it seems to me that the US has everything to gain from a devaluation of the Yuan. I can not think of a more advantageous arrangement than to exchange fiat currency for real goods and having that money loaned back to us at zero percent to fund our visits to the hospitals. Personally, I would have no problems with being able to spend every one of my dollar bills twice. If we end up closing our current account deficit and fiscal deficit, I don’t see any way that we can fund domestic services such as health care.

Secondly, I think you ought to look at the underlying socio-economic climate in China to understand the decision-making. The Chinese government has been under tremendous pressure to promote the livelihood of Chinese farmers, which necessitates the shedding of hundreds of millions of excess labor in farming. To that end, the Chinese government has recently passed a legislation that allows farmers to lease their land for long periods, which in effect creates greater mobility in the labor market. That’s one end of the bargain. On the other end, the government would have to find more productive uses of their labor, and I don’t fault the CCP one bit for promoting labor-intensive manufacturing industries to do so.

Anyway, I would love to hear your thoughts.

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# bsetser responds:

hmmm — observer, I am not a fan of being dependent on the generousity of others, and I also rather suspect that it is hard to build up the skills required to create leading edge products (or even not so leading edge products) once you lose them, so there is a cost to a period where you pay for your imports with bonds rather than goods and services.

as for your later point, it is a well developed line of argument — and a big part of the Dooler Garber Bretton woods 2 hypothesis. China will keep its exchange rate low to facilitate the outflow of labor from rural areas to urban export jobs.

two problems tho.

One. China hasn’t actually been promoting labor intensive industries, labor intensive exports. its export boom hasn’t produced a jobs boom. in part b/c the booming export sectors now tend to be capital rather than labor intensive.

Two. Relying on exports for jobs means more exposure to the global economic cycle, and it looks like there actually is a meaningful cycle — and that may work against the CCP’s desire for stability …

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me said:

Brad, thanks for responding.

Whatever impact the exchange rate had on the productive capacity of the United States had already been incurred a long time ago. It’s hard to think of anyone who would give up a banking job to go back to the Nike factories.

Do you have any evidence that exchange rates specificly have played any role in any loss of competitiveness of capital-intensive and knowledge-based industries in the States? It seems to me that to the extent we have lost competitiveness in those industries, take computer-chip manufacturing for example, it is the result of foreigners catching up in knowledge and skill rather than as the result of exchange rate distortions.

I would go even further to say that the capital surplus has improved our competitive standings in cutting-edge industries. For example, I can not think of any other government in the world that has $100 billion a year of funded spending on R&D for the military, where advancements in technology have often trickled down and commercialized. I mentioned another cutting-edge industry in my prior posting, which is the health care and pharmaceudical industry. I would argue that foreign financing has allowed the US to subsidize higher education and medical spending (demand and supply), two key factors in the rapid advancement of medicine and medical equipment.

Lastly, as you have admitted, the aim of the Chinese government isn’t to provide charity to the States but to maintain social stability by employing labor in more productive areas. Given the exposure of manufacturing industries to global demand, it is highly possible that the Chinese government will eventually develop a scheme to nationalize farming as the way to provide a social safety net to migrant workers.

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bsetser responds:

ummm — why doesn’t China have the capacity to start running 3-4% fiscal deficits rather than a 1% surplus?

and note that if China deals with its unemployment problem by subsidizing exports with an undervalued exchange rate/ maintains a large current account surplus it necessarily will be buying a lot of the assets of the rest of the world. Right now it buys treasuries — but it might change. And financially speaking, some might call these purchases a form of conquest … certainly assets are being transfered to China’s government.

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me said:

Brad,

I’m not aware of any reason why the Chinese government would have ran 3-4% fiscal deficits prior to the domestic and global slowdown. If you look at where the fiscal deficit spendings have come from in the States, they’ve come from the redistributive portions of the budget such as Medicare and SS spendings and also on national defense. China hardly has the luxury to spend on expensive medical treatment from the limited pool of domestic savings at the expense of private investments. Also, weren’t private investments driving up the GDP fast enough without the benefit of public spending?

The mere fact that credit is plentiful drives up the nominal value of assets held by the Chinese, which doesn’t mean the Chinese are getting any more payments on those assets than we get from our investments in China.

As protectionist as we are in our views about China possibly taking over the assets of US industry, the Chinese themselves are even more paranoid about the prospect. It is no coincidence that Chinese holdings of US securities, even those issued by agencies, have been liquidated in favor of further Treasury purchases. The goal is domestic employment and preservation of the exchange rate, not a takeover of American industry (for now).

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The exchange of ideas...I love it!

Another exchange with a poster who went by ReformerRay:

ReformerRay responds:

It makes sense to me. The country that sent the product had to have productive capacity. Productive capacity controls the wealth of a nation.

The U.S. was the leading nation in the world after WW II because of the ability of our industry to produce valuable goods.

Japan grew from the ashes of WW II to the second largest economy in the world because it expanded its productive capacity. And so it goes.

The bond the productive country got from the unproductive country can be exchanged for machine tools and other equipment to enhance productivity.

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me said:

ReformerRay,

I fail to see how this nation has lost its ‘productive capacity’ when it has the ability to churn out not one, two, or three, but four stealth jets that incorporate the highest levels of technological advancement in both material and electronic science.

I fail to see how ‘productive capacity’ has disappeared when we are on the verge of having hypersonic planes that can consistently fly at mach 8.

I fail to see how we have lost the edge to China or Japan when we have ships that not only can accurately track ICBMs but also strike them down with missiles of their own.

Do not confuse the absence of commercialization with the absence of capacity. This country has the top material and electric scientists and also the most skilled workers (ask somebody who works at Boeing if you disagree with me). The problem is that for political reasons no doubt we have not been able to commercialize and capitalize on this cutting-edge knowledge with the except of a couple of military deals here and there.

For this reason, my hopes in alt energy rest with the needs of USAF to keep its B2s flying rather than with private initiative. Time will tell.

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refomerray said:

The ability of Boeing to sell planes overseas has been one of the places where the U.S. exports more than it imports. The technological prowess in airplanes has been there for years. However, a friend of mine tells me that a large % of the new Boeing plane will consist of components made in Japan.

Every country has one or two or three areas in which they beat the competition. Semiconductors is another example of U.S. prowess.

However, it is the total that counts. The U.S has a very large goods trade deficit because our manufacturing sector has not been able to compete with goods manufactured in Germany and Japan. China is by far the largest source of our trade deficit. They are making things that we should not try to make. A trade deficit of some small size to one country will not kill us but a trade deficit with 5 major manufacturing countries that amounts to something like 400 billion per year means that the U.S. manufacturing sector is taking it on the chin.

In 1980, the U.S. manufacturing sector accounted for 45% of all the corporate profits produced in the U.S. In 2006, that number was down to 19%. This result was produced, in my opinion, by growth in the trade deficit in goods during those 25 years The trade deficit in goods in 1980 was only 11% of U.S. imports. By 2005, it had risen to 47%. Since U.S. exports are largely manufacturing goods, it makes sense to me that the substitution of goods made overseas (exports less than imports) for goods made in the U.S. is the reason that manufacturing now has only 19% of the profits generated by corporations in the U.S.

Observer - Please allow me to make one other point. National prowess was determined, in past years, by the military capacity of the country.

Since we do not want to use the Atom bomb and we have little stomach for bombing any country into oblivion, the military superiority of the U.S. is perhaps a handicap. Military superiority, along with other considerations, must have played some part in the decision to invade Iraq. Turns out defeating the Iraq army was not the end of our problems.

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me said:

ReformerRay,

Facts and figures are impartial and I’m certainly not here to debate about their accuracy. However, it is important to judge whether a particular set of facts and figures hold any relevance to the debate over a particular argument. The fact that the manufacturing sector has decreased in relative proportion to other sectors in the makeup of the GDP does not contradict my argument that there is a lot of latent manufacturing capacity that has been held down by geopolitical objectives.

The US currently holds the patents to eight of the top ten fastest supercomputers in existence, and yet not only is industry barred from selling the product to China, it’s also barred from selling many of the key components to allies as well in fear of Chinese espionage. Imagine if you are a skilled worker who could’ve had a well-paying job manufacturing one of these high tech products instead of holding down the sales job at Best Buy. It seems to me that you ought to blame Uncle Sam here and not the Chinese.

Again, do not confuse the absence of commercialization with the absence of capacity.

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Blogging is too fun. Maybe I'll start my own someday.

I fail to see how this nation has lost its ‘productive capacity’ when it has the ability to churn out not one, two, or three, but four stealth jets that incorporate the highest levels of technological advancement in both material and electronic science.

I fail to see how ‘productive capacity’ has disappeared when we are on the verge of having hypersonic planes that can consistently fly at mach 8.

I fail to see how we have lost the edge to China or Japan when we have ships that not only can accurately track ICBMs but also strike them down with missiles of their own.

Do not confuse the absence of commercialization with the absence of capacity. This country has the top material and electric scientists and also the most skilled workers (ask somebody who works at Boeing if you disagree with me). The problem is that for political reasons no doubt we have not been able to commercialize and capitalize on this cutting-edge knowledge with the except of a couple of military deals here and there.

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Not in the short run, but in the long run, the hollowing out of the commercial sector will inevitably and irreversibly affect the military sector. Remember, folks, economies of scale. The shipyard that does not produce container ships, tankers and cruise liners will have to charge its entire cost of operation, its entire cost of staying alive and remaining in business, to the military contracts. That means the cost of let's say, of a destroyer.

The overemphasis of the military state over the commercial state is what destroyed the Soviet economy. Remember, they built more bombs, jets, rockets, missiles, more nuclear subs, some of the most powerful warships the world has ever seen, the first satellite, the first man in space...

Today, they're the industrial dwarf compared to Japan, which compared to the Soviet Union, hardly built any of the military stuff in comparison.

Because of the hollowing of the production sectors, guess where do the brightest scientists and engineers go? Three choices. Either get unemployment benefits, two, work as a clerk serving fast food, and three, transfer to another company or country that will hire you. When talent moves elsewhere, it also leaves a vacuum because there is no one to teach these skills to a new generation. Guess what the long term effects are.

Never think about the status quo. Always think in terms of trends and the movement of time. Always extrapolate on the inevitable conclusions of current trends.

Semiconductors is another example of U.S. prowess.

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The most advanced processors, like IBM's Cell, are now partnered with Sony and Toshiba. AMD now makes its Athlons in Taiwan. nVidia and ATI chips are also made in Taiwan.

Notice how its impossible to manufacture a PC motherboard now in the US? That's because all the manufacture of the resins and adhesives for these have moved elsewhere to Asia. A motherboard resin seems like low tech, but without it, you got nothing you can serve as a foundation for a motherboard, essential in all things digital. This not only affects PCs, but even things like TVs and celphones. Once the rot starts here, it spreads there. In short, no one really foresees when you close down the US TV industry, it has a long term effect, that led to the demise of personal computer manufacturing in the US, and in fact of all commercial electronics manufacturing in the US (XBox 360s and Apple iPods are not made in the US either).

Economies of scale means suppliers of components would move to where the components are made. Manufacturing works like gravity---capital, talent, components makers, materials suppliers, are all drawn to the center of activity---and away from where there is not.

The US currently holds the patents to eight of the top ten fastest supercomputers in existence, and yet not only is industry barred from selling the product to China, it’s also barred from selling many of the key components to allies as well in fear of Chinese espionage. Imagine if you are a skilled worker who could’ve had a well-paying job manufacturing one of these high tech products instead of holding down the sales job at Best Buy. It seems to me that you ought to blame Uncle Sam here and not the Chinese.

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This guy is joking right? China build its parallel supercomputer, now one of the top 10, using AMD Opterons.

I fail to see how this nation has lost its ‘productive capacity’ when it has the ability to churn out not one, two, or three, but four stealth jets that incorporate the highest levels of technological advancement in both material and electronic science.

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And yet, can't build a single car that is better than a Honda Accord or a Toyota Prius. Guess what secure more jobs to pay for a middle class.

Thanks PLA & Engineer for answering my questions.

You right, its hard for people like me to understand why these sort of problems can't be solved.

Anyway, lets hope that as China becomes more developed and a rising middle class will be determined to stop this kind of fuedal mentality where those in power thinks they have a right to be rewarded because they are in a position of power.

Opps...a case of mistaken identity in a previous post

Crobato, thanks for the input. I'm curious about something. Since the private sector has a history of benefiting from the trickling down of technology (the internet, satellites, credit cards, etc), I'm curious whether you see the same potential in the stuff that they are working on now. If it weren't for geopolitical reasons, don't you think that the US could have made a killing from selling supercomputers to China in the 90s and earlier this decade?

FugitiveVisions said:

Crobato, thanks for the input. I'm curious about something. Since the private sector has a history of benefiting from the trickling down of technology (the internet, satellites, credit cards, etc), I'm curious whether you see the same potential in the stuff that they are working on now. If it weren't for geopolitical reasons, don't you think that the US could have made a killing from selling supercomputers to China in the 90s and earlier this decade?

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Supercomputers are no longer as high tech as they seem to be before. Previously they---back in the eighties---represented the ultimo in mainframe technology. But that's when supercomputers were either based on a single CPU or a few CPUs (coarse grained). Today, a supercomputer is nothing more than a network or farm for the better sense of the word, of servers based on PC technology. Its all nothing but massive scale parallel processing. There are even supercomputers that are actually comprised of thousands of PCs across the Internet. All these PCs do is download a program, which in conjunction with another program in a central server, takes a mathematical task and divides it across all those thousands of PCs to be computed. This program, called Going Home also has a Sony PS3 version, a PS3 right now is something a decade ago would fit the definition of a supercomputer, when you can do a teraflop. (Based on its computational speeds, the Sony PS3 would be on the US ban list for exports to China, among which does not allow for supercomputers to be exported there.)

Military technology development is actually a form of Keynesian or government spending and determined development. This is not to say its not bad. Technology development that are ignited and encouraged by the government whether for civil or military purposes is good to start the ball rolling.

But in the long run, this is like the turtle and the hare situation. Keynesian form of technology development eventually runs out of steam and could not muster the economies of scale needed for long term sustained development. This is where the private sector takes over. This is why a technology first developed in the military has to pass over to the civilian sector for its long term growth. Case in point is the Internet. This is why a technology that is initiated by the government has to pass over the private sector, such as the case of the telephone system and Ma Bell.

The Soviets had a running start on many technologies in the fifties, but in the eighties, the West pulled ahead in one critical area---electronics---because of the private development of that sector. This pulling ahead accelerated further leading to the use of the term COTS. Today, both the military and the government no longer initiates IT projects as often government initiated IT projects even back in the late eighties, were simply overtaken by private developments. They just rely on COTS. Now everyone uses COTS, including the Russians. Even the CMS of the state of the art warship uses PC techs.

Currently China's supercomputers are using AMD Opterons, which is a multi core Athlon based CPU used for PC servers. Like their counterparts in the US, they're nothing more than glorified server farms. Its not hard to see how China can build a supercomputer out of Godsons and Longsons. If you want to make a supercomputer faster, all you have to do is just keep adding as many CPUs into it as long as the budget allows.