Posted on 12/31/2008 4:13:01 AM PST by TigerLikesRooster
Wednesday, December 31, 2008
Groundwork for Trade Conflict Being Laid?
We have worried out loud that the policy remedies being pursued by the US amount to trying to restore the status quo ante to as great a degree as possible, particularly in trying to resturn US overconsumption to something approaching its former levels. Although it may be difficult to work two agendas, crisis response and addressing the root causes of our economic mess in parallel, focusing solely on the former runs the considerable risk of that we will see only a shallow recovery, with many of the elements of the crisis soon reasserting themselves in more virulent form.
Similarly, the Chinese, who at least in theory had accepted that they needed to let their currency rise (and presumably over time move to a more balanced, less export-dependent economy) have similarly gone into full reverse gear. The RMB has now been more or less re-pegged to the dollar, and China is moving in other ways to shore up exporters (such as pressuring banks to lend).
Michael Pettis points to a related, troubling development: other emerging economies are seeking to restore or increase trade surpluses. That in turn means SOMEONE has to import. But the US wants to increase exports (and the move by the Fed to quantitative easing will have the side benefit, from its perspective, of weakening the dollar). Euroland is neither keen nor able to step into the US role of importer of the last (and first) resort (boldface ours):
(Excerpt) Read more at nakedcapitalism.com ...
One consequence of the financial crisis will inevitably be capital outflows from developing countries. The necessary corollary of capital outflows is trade surpluses. Without running a trade surplus no country can consistently support capital outflows, and as obvious as this is, it also seems to be a source of tremendous mystery to many experts and policymakers. Keynes for example pointed this out in his fury at the way Germany was required to post war reparations in the 1920s while its ability to generate export surpluses was all but eliminated by the victorious powers. Capital exports by definition require trade surpluses.
This is just another way of saying that a lot of developing countries that had been running trade deficits will soon be, if they arent already, running trade surpluses. Instead of contributing their net demand to the world economy, as they had via their trade deficits, they will now be contributing their net supply.
This will not help the world imbalances. The biggest contributors of net demand are the US and non-Germany Europe, and both of these regions are seeing a rapid decline in their net demand contribution (i.e. their trade deficits are expected to shrink). To adjust to this decline the world needs new sources of net demand or else global production must contract sharply via factory closings and rising unemployment. But the largest net supply country, China, is increasing its export of net supply (its trade surplus has been rising) while several trade deficit countries in Asian and elsewhere are switching to trade surplus or otherwise trying to reduce their deficits.
This cannot be sustainable. We cannot expect production to rise while consumption declines except if it comes with a dangerous rise in forced investment (also known as inventory). The crisis cannot even begin to be considered in its final stages until this issue is resolved.
Everyone is working hard to increase global trade imbalances
Ping!
Saturday I was talking to an investor from France, a high profile investor from Germany, and a Mexican entreprenur. All of them were madder than hornets, that they themselves had contributed to the value of the dollar, making American dollars the world wide trading instrument, only to have the American Gov’t bail out banks, whose directors took their ‘golden parachutes’, to pad their fall into disgrace. They as well have lost fortunes, and no one is bailing them out or any other foreign investors who had much at stake in the world that is crashing that is centered in New York on Wall Street.
Tiger...
The blog comments at Naked Capitalism are equally interesting.
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