Welcome to ‘Planet Bernanke’ where unintended consequences overpower the ‘other kind’. Here’s Paul Krugman trying to justify what he clearly doesn’t understand.
Taking On China
By PAUL KRUGMAN
Major advanced economies are still reeling from the effects of a burst housing bubble and the financial crisis that followed. Consumer spending is depressed, and firms see no point in expanding when they aren’t selling enough to use the capacity they have. The recession may be officially over, but unemployment is extremely high and shows no sign of returning to normal levels.The situation is quite different, however, in emerging economies. These economies have weathered the economic storm, they are fighting inflation rather than deflation, and they offer abundant investment opportunities. Naturally, capital from wealthier but depressed nations is flowing in their direction. And emerging nations could and should play an important role in helping the world economy as a whole pull out of its slump.But China, the largest of these emerging economies, isn’t allowing this natural process to unfold. Restrictions on foreign investment limit the flow of private funds into China; meanwhile, the Chinese government is keeping the value of its currency, the renminbi, artificially low by buying huge amounts of foreign currency, in effect subsidizing its exports. And these subsidized exports are hurting employment in the rest of the world.
Chinese officials defend this policy with arguments that are both implausible and wildly inconsistent.
Professor K defends his own silliness with arguments that are equally implausible and wildly … inconsistent!
First of all, developed economies are reeling from the consequences of mispriced inputs. The housing bubble collapse was simply one manifestation of declining output across the developed world as ‘Mr. Market’ began repricing inputs to reflect reality. If mispricing inputs isn’t a form of manipulation, what is?
Second; developing countries are experiencing inflation as a consequence of flows between sectors. There is deflation in the developed world alongside inflation in the developing world.
Third: Professor Krugman needs an editor. Carefully read, “Restrictions on foreign investment limit the flow of private funds into China; meanwhile, the Chinese government is keeping the value of its currency, the renminbi, artificially low by buying huge amounts of foreign currency.”
What is it, Prof? Either currency is flowing into China or it’s not! Good grief!
The flow between China and the US a consequence of ultra- low US interest rates and the resulting carry trade. Traders borrow and sell- short cheap dollars and use the ‘carry’ to fund higher- yielding investments in China … and elsewhere. ‘Carry Trade’ is a market- technical term that means ‘currency manipulation’. If Planet Bernanke wanted to rebalance currency flows overseas he would abandon the zero- interest rate policy.
China also gains dollars because it sells a lot of goods to the US. In a way, the Chinese bailed the US out by gratefully accepting all those high- wage US manufacturing jobs that nobody here thought we needed any more. Absent a China taking these counterproductive jobs, who knows what horror would have befallen the US economy what with increasing real energy costs added to those high wages. The US would have experienced inflation rather than the Chinese.
The deflation that began in China a couple of hundred years ago when the European powers carved the country up into fiefdoms would never have ended.
High wages and high energy costs are bankrupting US states and municipalities right now. Maybe China should import some US firefighters and teachers and bail out California and Illinois!
The real problem is discussed in yesterday’s essay about the value relationship of commerce to ‘money’. Fiddling with the money accomplishes exactly nothing. Don’t believe me, check out what a real analyst has to say!
The House Ways and Means Committee is demanding that China raise its exchange rate by 20%. This would enable speculators to put down 1% equity – say, $1 million to borrow $99 million and buy Chinese renminbi forward. The revaluation being demanded would produce a 2,000% profit, turning the $100 million bet (and just $1 million “serious money”) into making $2 billion. It also would bankrupt Chinese exporters who had signed dollarized contracts with U.S. retailers.
Currency revaluation would bankrupt the entire country which would become an endlessly- sucking currency trap. The 1% equity million$ would vanish overnight. Nobody would be able to get their funds out of China!
China is experiencing inflation now. Partly this is the result of those currency inflows that are the result of Planet Bernanke’s currency devaluation efforts! Pressure on China increases because Communist Party hot- shots have ‘invested’ up to their eyeballs in real estate ‘development’. Arbitrarily raising the currency value would put tremendous pressure on these ‘investments’. Instead of repaying loans in yuan that are valued by the cheap- goods, cheap- yuan trade to the US, the ‘Leadership cadre’ would have to repay in money worth a lot more – and that much harder to get! Instead of leading Wall Street Richie Riches to the promised land the outcome would be dollar exchange crisis as Beijing clamps on capital controls. Who know what would happen to the world economy after that!
The US economy is so ‘weak’ (destitute) it cannot withstand interest rates above .25%! How would it survive a ‘funding strike’ from our primary trading partner?
Keep in mind there is a dollar/HK dollar/yuan cross trade taking place right now. It would seem that the Hong Kong currency traders see the dollar reasonably priced in yuan. If the yuan was undervalued, Hong Kong traders would buy it and sell US dollars using the freely- traded HK dollars as the intermediary … and unwind Prof. Krugman’s dollar trade.
Only an economist would argue with Mr. Market.
If Professor Hudson’s worst- case scenario actually took place the US Treasury and the Fed would be called upon to bail out the Wall Street firms and at a remove the Chinese! Are we ironic, yet?
Here’s a message for Congress, Bernanke and Prof. Krugman: It’s not the money, its the value of commerce. We’ve outwitted ourselves with our cleverness: Chinese commerce is less valuable than the domestic iteration we mindlessly shipped overseas. Chinese commerce is less valuable to the US and also less valuable to the Chinese. they are a ‘cheap – everything’ producer. They add little value to what they actually make and export. Chinese workers earn very little, too little to afford the products they make with increasingly costly inputs. America and China are both going broke and for the same reason.
The fatal error for the Chinese has been to import worthless US commercial culture along with our now- worthless jobs.
The $2 trillion that the Chinese hold in their vaults reads like a lot of money. It is a half- day’s trading on the foreign exchange markets. It’s a bagatelle …
Meanwhile, back on Planet Bernanke we have another market: Crude is starting another spike.
These fine charts by WTRG Economics! The price is off the charts: almost $80!
This is November 2012 contract for Nymex Crude (from TFC Charts). The current (?) Bloomberg Brent crude price is $83.
This price is very high for an economy that requires cheap oil to run. If the past is prologue the high price will start to strangle the real economy and the knock- on effects will undo the ‘inflation’ voodoo that is emanating from Planet Bernanke. Reports Ambrose Evans- Pritchard:
Stephen Lewis from Monument Securities said the Fed is playing a risky game toying with more QE. There are already signs of investor flight into commodities. The danger is a repeat of the spike in 2008, which was a contributory cause of the Great Recession. “Further QE at this point may prove self-defeating,” he said.
Meanwhile, Dominique Strauss-Kahn, managing director of the International Monetary Fund, tried to play down the fears of a currency war, saying he did not think there was “a big risk” despite “what has been written”.
Right!
I don’t have to invent anything but can look at charts. Up inevitably leads to down. Big up leads to a bigger – and more deflationary – down!
The Nov. 2012 chart doesn’t suggest a price breakout. Perhaps futures’ traders can’t see a future with inflation – Planet Bernanke might fall out of orbit. Then again, what would a bunch of dumb- ass futures traders know about … the future?