Brad DeLong's Semi-Daily Journal: A Weblog

Punchline: World stimulates domestic demand.

How: World doubles the minimum wage.

Result: U.S. is no longer the consumer of last resort and will no longer be able to 'finance' world security. Lack of basic commodities lead to strategic shortages.

U.S. Response: World war...

Alternative: U.S. doubles the minimum wage (or passes SS 'reform')

Result: Massive U.S. inflation and debtors (American consumers) become debt free

World Response: Submissive anger...

He has a truly wonderful proof of his proposition, which this margin is too small to contain? Hopefully it won't take another 300 years.

Although ultra-low Chinese wages will keep some made-in-China products competitive despite any conceivable yuan:dollar rate adjustment, the fact is that a large fraction of China's trade surplus with the US is actually a hidden additional trade deficit with Japan -- high-value Japanese parts go to China for final assembly on their way to the US. Overall, China has little or no trade surplus. For many of the products, most of the cost is in the Japanese parts, and if the yen:dollar rate adjusts as it should, the effects may appear very quickly.

When yen/dollar last bottomed in mid-April '95, stores all over Japan were looking for US products to sell. There was a boom in American beers, for example. Since it takes time for things to get going, it was in '96 that our trade deficit with Japan bottomed out at $47.6 billion, down nearly 30% from $65.7 billion in '94. Then the dollar began to rise again (BOJ intervention?), and the momentum was lost.

Dear Brad,

Sending a comment to add to the conversation is terribly difficult. Comments either can not be sent or are delayed many hours. I do miss the threads of conversation, but have no sense of why the difficulty has been so severe with this software version.

Anne

One difficulty with solving the problem is the shortage of forums for official discussions to take place. The International Monetary Fund (agency of UN) was the peacekeeping forum from the end of WW2, but the 'Plaza Accord' in 1985 effectively took away its responsibilities for overseeing the global economy.

Therefore no one's in charge at present. The UN's troubles are being visited upon the rest of the world.

1. Devalue the dollar.

2. ???????

3. Profit!

Has Wolf been reading Brad Setzer (http://www.roubiniglobal.com/setser/archives/2004/11/where_are_china.html)? If so, he should give attribution.

Three possibilities:

1. The US cannot consume all the world's exports.
Other countries need to spend more effort developing their own internal markets and domestic demand.

2. US runs a fiscal surplus again.

3. US invades Iran, prompting the usual rush for financial 'safe havens' in US assets, again propping up the dollar.

I have a question. Are interest payments on debt paid to foreign lenders considered part of the trade imbalance? It seems to me they should be, but are they?

Please explain: how is the Chinese government out $200 billion? Since its Treasury doesn't own the assets at the central bank, are we assuming it has to recapitalize the bank when the latter suffers exchange losses? Why?

ACCORDING TO PREVIEW I GET NO LINE BREAKS? WHY?? APOLOGIES FOR RESULTING LACK OF READABILITY. "has a clever scheme for avoiding the dollar crisis"

Hmmm, technically what he said was he wants to find a way for "[t]he world ...[to]... escape from its reliance on the US debt trap."

When you, or I, being American citizens say "avoid the dollar crisis" we mean "get out of BushWorld without a great loss in our place in the world and standard of living."

But Mr. Wolf telegraphs that he might be quite satisfied with a solution that we would find rather distressing.

Brad,
We are in the midst of the rise of non-Japan Asian economies: China, India, Vietnam, Indonesia, Malaysia, etc. Their currencies will appreciate dramatically against the dollar.

This is quite separate from the dollar's position with respect to the Euro and Yen. Please enlighten your readership: what is our trade balance with the Euro monetary union? And with Japan?

I contend that when the Chinese stop pumping dollars into our economy (to the exclusion of the EU and Japan), there will be a temporary severe depreciation of the dollar against the Euro and Yen, but the dollar will recover, for the currency flows are massive compared to China's T-bill purchases. The fundamental reality underpinning the dollar-euro-yen situation is that the economies of Europe and Japan are very similar to the US in all respects.

Exit Question: When does OPEC start conducting oil transactions in renmimbi?

As has been mentioned many times, Asian governments (including Japan's) support the currency framework because they believe it is in their best interests. I think a plausible case can be made that they are correct.

Japan, with its own large budget deficit, pays to its creditors somewhere between 1 and 1½ per cent and receives around 3 per cent from its holdings of US Treasuries. In the jargon of Wall Street, this is a pretty fair "carry-trade", especially when the risk-taker is the government and not the private sector. For China, US Treasuries are very attractive assets with which to back up the country's weak banking system. Europe has its own somewhat mercantilist attitude, inadequate governmental capacity and many structural rigidities. As a result, the euro will be caught in a squeeze. In the near term, its value will rise against the dollar, perhaps by more than the Chinese and Japanese currencies. Europe will be disadvantaged globally.

Technical and business know-how are being transferred to China at a tremendous rate. It is in their interests to allow this to continue. A decade of sub-par returns on their Treasury investments is a small price to pay for this. Also, China's system is awash in money and needs to be cooled down. Capital is often allocated inefficiently due to corruption and incomplete establishment of a market system. It is not clear at all that they would benefit from the PBOC injecting those billions of dollars into the local economy rather than holding them in Treasuries, despite what Mr. Wolf writes.

http://infoproc.blogspot.com

I do so miss the conversations. My faith in technology wavers. Poor struggling Brad :)

"I have a question. Are interest payments on debt paid to foreign lenders considered part of the trade imbalance? It seems to me they should be, but are they?"

Yes, they appear as a debit on the current account. Line 33, I believe. So, indeed, swelling interest payments on foreign-owned government bonds implies a growing trade deficit. This can snowball out of control in some circumstances, obviously.

An interesting point about a looming reversal in net payments (from the Economist):

So far America's hefty debt has not been a burden on its economy, mainly because it has pulled off an extraordinary trick. Although it is a large net debtor, it does not have to make net payments of interest and dividends to the rest of the world. Instead, America still enjoys a net inflow of investment income because it earns a higher average return on its foreign assets than it pays on its liabilities. Returns on foreign direct investment and equities are higher abroad than at home, and America has benefited from unusually low interest rates on its borrowing in recent years. Unlike in previous periods of dollar decline, bond yields have remained low—largely thanks to those huge purchases by foreign central banks. But as interest rates rise in future and net foreign debt mounts, America's net investment income is likely to turn negative, probably next year. Not only will that swell its current-account deficit, but it will also exert an increasing drag on the economy.

http://infoproc.blogspot.com/2004/12/executive-summary.html

kharris - Wolf not only cited Roubini and Setser, he gave them credit for the main thrust of the piece - and then addended the link (at least in the printed version of FT). This Brad left the citation part out....