China is hopeless, if you are trying to decipher economic trends. On one side, it is very interventionist and does all sorts of monetary madness. Their banking system has enormous amounts (according to rumours, of course) of bad loans. They should crash, eventually.
The question is, are they MORE or LESS interventionist than other economies (most specifically Europe and the US). Because capital always goes where it is treated best. Economic activitiy and trade will expand most where people interfere the least. And this is where it gets interesting.
China just became the world leader in international trade, ahead of the US. I can’t really figure out what this means. Maybe they are just trading things to and forth for the heck of it. Maybe its all some sort of ponzi-economics. I would suspect that trade figures for Japan during the 80′s were pretty amazing as well (but did they surpass the US?).
But we all know that the dollar is built on a few distinct pillars. Domination in trade. Largest (presumed) gold reserves world wide. Free capital markets. If China beats the US on enough of these criteria, they will surpass.
I still can’t figure it out. Not yet, at least.
I just woke up this morning and CNN and others are reporting that the Pope has resigned. Carol Costello, one of the news anchors, kept talking about the church and gay rights and all this stuff, knowing that it’s a traditionalist organization that isn’t going to drop any archaic views anytime soon.
Anyways, the central bank supporters are probably going to link to China as proof that central banks are still effective managers of monetary policy. I know Scott Sumner is pretty insane in the brain when it comes to his obsession with only NGDP, but I really am starting to warm up to this idea that he had in this article.
“Another approach — which would be more radical, but perhaps also more effective — would limit the Fed’s role to setting the NGDP target, and would leave the markets to determine the money supply and interest rates. This would mitigate the “central planning” aspect of the Federal Reserve’s current role, which has rightly come under criticism from many conservatives. To give a simplified overview, the Fed would create NGDP futures contracts and peg them at a price that would rise at 5% per year. If investors expected NGDP growth above 5%, they would buy these contracts from the Fed. This would be an “open market sale,” which would automatically tighten the money supply and raise interest rates. The Fed’s role would be passive, merely offering to buy or sell the contracts at the specified target price, and settling the contracts a year later. Market participants would buy and sell these contracts until they no longer saw profit opportunities, i.e., until the money supply and interest rates adjusted to the point where NGDP was expected by the market to grow at the target rate.
It might be helpful to compare this idea to the old international gold standard. Under that system, the U.S. government agreed to buy and sell unlimited gold at $20.67 per ounce. This kept gold prices stable, and the money supply adjusted automatically. Unfortunately, however, stable gold prices did not always mean a stable macroeconomic environment. Putting NGDP futures contracts on the market along a similar model would likewise create a stable price for those contracts, hence stabilizing expected NGDP growth. And stable NGDP growth would be more conducive to macroeconomic stability than a stable price of gold, especially in a world in which rapidly growing demand from Asia might distort the relative price of gold.”
http://www.nationalaffairs.com/publications/detail/re-targeting-the-fed
This is one of the most politically viable market oriented suggestions that I’ve heard and far better than the first suggestion of the central bank having more of an active role in monetary policy and it makes so much sense when you think about it. I think the misallocations in an economy are more likely to naturally settle out with a system like this. If it weren’t for a guy like Gene Callahan, I would have never thought of it this way. He says that there are many different ways of diagnosing an economy and he believes that it was a combination of Austrian mainvestments, a huge housing bubble, a drop in aggregate demand, and an NGDP drop that caused the financial crisis, so in this way, the Austrians, the Keynesians, and the monetarists were all right but in different areas and diagnosed different pieces of this complex puzzle. I would also add that Fannie Mae and Freddie Mac were created during the New Deal, so you could count those as being created by the government and possibly considered to be excessive regulation.
China is utterly dependent on exports and trade isn’t the best metric to use, rather profitability is. (This also ignores that China’s economy is dependent on the US Navy not enforcing an embargo) The fact is that most of China’s industries would operate with negative margins without support of the central government. At some point the true value of any investment has to come out, and China’s massive investment in exporting, transportation, and urban buildup, while looks impressive, will have a negative impact on GDP eventually.
China is importing massive amounts of gold because of how exposed they are. Ultimately wealth is stuff, not dollars, yen, euros, or yuan. China is desperate for gold because they realize that they have entered an arraingment that doesn’t benefit them. There are few consumers that can meet China’s needs, there are many producers that can meet America’s and Europes.
The fact is that 60% of their reserves are in dollars, and if the US says we aren’t going to pay, then there is nothing China can do to collect, after all the Chinese don’t even have a blue water fleet yet. China is already facing demographic decline, so what happens if 60% of their nest egg goes up in smoke? Internal crisis, the Chinese know this, and America knows this. In some ways the scheme of the US is incredible, they are exchanging worthless paper for tangible goods, specifically, military hardware. What is worth more? 6.2 billion in foreign government treasuries or a blue water aircraft carrier complete with an aircraft wing? Or the billions the US is putting towards their strategic space program?
The US is using economics to it’s advantage, the same thing it did with the Soviet Union. What’s terrible is that in the end this will affect billions of people by resulting in a lower standard of living in America, China and abroad. But government’s don’t care about their citizens, only their interests.
I just had another thought. What happens if the US selectively defaults? Meaning that they say, no we aren’t going to pay the Chinese, but then say that they will keep paying the Europeans and Japanese; perhaps pay them above the return rate to try and keep them from freaking out. I don’t have any clue who this would hurt more, as it would be dependent on how the rest of the world reacts, but the US has used economic warfare in the past.
Study my Letter on Diane@Philosophyinaction.com. (Search: Crazy Inbox)
China doesn’t have a chance of beating the US.
As I understand it, China is Officially Communist. Various Famous Economists, such as Professor Ludwig von Mises, proved some time ago that Ideologies such as Communism, Socialism, Naziism, Collectivism, etc., don’t work, never did work, never will work.