What “adjustment” means
Michael Mandel of Business Week:
As of the third quarter of 2007, the 10-year growth rate for consumption was 3.6%, vs. GDP growth for the same period of 2.9%. This difference represents an enormous gap. If consumer spending had tracked the overall economy over the past decade as it has in the past, Americans today would be spending about $600 billion less a year.
Well put. If consumption growth had tracked income growth, the US current account deficit would also be about $600b smaller.
We can debate whether the more rapid growth of consumption in the US fundamentally reflects US policies that stimulated consumption (whether fiscal loosening or low US “policy” interest rates after the .com bubble) or policies outside the US that held demand growth below income growth, freeing up funds to lend to the US. It probably reflected some complicated combination of the two, as policies outside the US that restrained demand growth pushed the US to adopt policies to spur US demand in order to maintain full employment.
Workers leaving tradables production in the US (and manufacturing in particular) had to absorbed elsewhere in the economy.
What is undebatable is that the period when US consumption grew faster than US income allowed the rest of the world — and particularly the emerging world — to export more than it imported. The result: a rise in the emerging world’s aggregate surplus that closely mirrors the rise in the US deficit.
Asia and the oil-exporters would not be simultaneously able to run large surpluses if US consumption growth had tracked US income growth. Instead, over the past ten years, the US saved less, allowing it to buy more.
Adjustment — real adjustment — requires a sustained period when US consumption grows more slowly than the overall economy. That would lead US savings to rise, and reduce the United States need to borrow from the rest of the world. That change, in turn, implies that consumption outside the US would need to grow more rapidly than income. The rest of the world will no longer be able to draw on US demand to support growth; rather, the US will need to draw on global demand to support US growth.
That will be a big change. It started in 2007. Consumption growth still exceeded GDP growth (2.9% v 2.2%). But the sharp fall in residential investment led US demand to grow more slowly than US income, and reduced the growth in US imports below the growth in US exports (2% v 7.9%). The BEA data clearly shows that the improvement in the current account deficit came from the fall in imports, not an increase in the pace of export growth. Real export growth was actually a bit slower in 2007 than its 2004-2006 average.
Martin Wolf is worried that the current US policy mix — expansionary fiscal, expansionary monetary policy — will work too well. He notes that global adjustment requires policies that stimulate demand in the surplus countries — not policies to stimulate demand in the deficit country. And right now, the global policy mix is weighted too heavily toward demand stimulus in the deficit country.
He has a point. Though I spent enough time with Dr. Roubini to think that the current American policy response is needed to prevent too sharp a fall in US demand, and too quick a retrenchment by credit constrained households that can no longer borrow against rising home values.
Nonetheless, it would be mistake for the world — after the US and the world work through their current economic difficulties — to go back to the old habits that Dr. Mandel vividly illustrated.
US consumption needs grow more slowly than US income for a while. And in the emerging world, consumption will need to exceed income growth.
UPDATE: Peter Goodman of the New York Times takes on a similar theme.
No Responses to “What “adjustment” means”
Michael Pettis • February 4th, 2008 at 3:47 am
Brad,
I wish I could see the whole set of numbers — I wonder if Mandell’s disparity between GDP growth and consumption growth begins to widen at the time of the Asian crisis.
If there is a US slowdown that reduces China’s export growth, and if Chinese consumption continues to grow smartly (a big if, because a rise in economic uncertainty could increase Chinese savings), we may see a sustained period where Chinese consumption grows faster than GDP, especially as the economically active part of China’s population begins to decline much more rapidly than the consumer population (after 2010). The same is likely to happen in Japan and Europe, where we have similar (though not as dramatic) demographic trends.
That, I guess is the benign scenario. The ugly scenario is where a slowdown in US consumption causes a relative slowdown in European, Japanese and/or Chinese consumption and the world rebalances via a race to the bottom.
RebelEconomist • February 4th, 2008 at 4:11 am
A post dedicated to US policy choices is welcome!
As you say, US consumption needs to fall, and the problem is how to achieve this with the minimum fall in output below potential. It would therefore seem to be sensible to target any stimulus at the non-consumption parts of demand – eg investment tax credits. Since I doubt that such incentives can have sufficient influence on the private sector, I would like to see the US government force the issue by increasing taxes and spending the revenue on investment in public infrastructure and education. There may not be much political support for that, but the economist’s role is to tell the politicians what is feasible, not what they want to hear.
I fear though that countries like the US and the UK have a bigger problem than just the share of consumption in output. This is that the rise of Asia has permanently shifted their terms of trade (in favour of commodities) so that even consumption’s existing share of output does not buy as much real consumption as people have come to expect. And getting them to accept that is a real political hard sell.
Nicolas • February 4th, 2008 at 4:54 am
If U.S. consumption needs to fall then the whole consumer infrastructure needs
to contract / implode. The whole problem is the economies of today need consumers to spend every cent in their pockets to sustain it.
Anonymous • February 4th, 2008 at 6:39 am
“What is undebatable is that the period when US consumption grew faster than US income allowed the rest of the world — and particularly the emerging world — to export more than it imported. The result: a rise in the emerging world’s aggregate surplus that closely mirrors the rise in the US deficit.”
It’s a new day! This is eerily causal. I don’t recall you ever writing on international imbalances with such an orientation to the role of US consumption, and positioning foreign savings as a result rather than a cause. Similarly for the required adjustment of reduced US consumption, resulting in reduced foreign saving.
Guest • February 4th, 2008 at 6:59 am
In what many political observers are calling an attempt to shore up his evangelical base on the eve of the nation’s Super Tuesday primaries, former Arkansas Governor Mike Huckabee today asked Jesus Christ to stimulate the U.S. economy.
Mr. Huckabee has invoked Jesus’ name at many points in the primary season, but his extraordinary request marks the first time a presidential candidate has directly asked a deity to provide the nation with an economic stimulus package.
In a press conference in Mobile, Alabama today, Mr. Huckabee said that he had asked Jesus to stimulate the U.S. economy with “a fresh infusion of loaves and fishes.”
The former Arkansas governor was not specific about the exact dollar amount of the loaves and fishes that he had asked Jesus to inject into the U.S. economy, but advisors later said that it was somewhere in the ballpark of $70 billion.
bsetser • February 4th, 2008 at 8:03 am
anonymous — don’t worry, my fundamental views haven’t changed. normally, a rise in consumption v income (fall in savings) would put pressure on interest rates, and either slow consumption growth or reduce investment. the great puzzle is why that didn’t happen — and I do think policies that increased emerging market savings played a role.
And I think policies that reduce EM savings (i.e. support demand) are central to the benign adjustment scenario.
Michael — the BEA has an annual time series that goes back through the 1990s in the .pdf GDP data release that I linked too. And yes, it does start with the Asian crisis. 1998 precisely.
incidentally, the new world bank quarterly has the contribution to Chinese gdp growth from net exports falling q4, but the fall is offset by other components of domestic demand — the economist is right, at last! for 08, they expect chinese growth to slow due to a smaller contribution from net exports …
Dave Chiang • February 4th, 2008 at 8:13 am
Rising Chinese yuan forces difficult “structural adjustment” on labor intensive industries in Southern China
http://www.atimes.com/atimes/China_Business/JB05Cb01.html
HONG KONG – Guangdong’s thousands of shoemakers, many of whom saw the start of the province’s transformation into China’s engine of modernization, are packing their lasts and moving elsewhere as the Pearl Delta Region undergoes another economic metamorphosis.
The once-dynamic shoemaking industry has become a remnant of its old self, with more than 1,000 footwear and accessory producers going out of business amid an increasingly unfriendly environment for their operations.
As many as 10,000 factories, many invested from Hong Kong, are expected to close around the Lunar New Year holiday on February 7. Millions of migrant workers heading home to inland provinces with New Year bonuses in their pockets are unlikely to have work to draw them back.
About 50% of the shoemakers that have closed down in Guangdong have moved their factories to China’s hinterland, setting up in Hunan and Henan in the center of the country, in Jiangxi in the east, and in Guangxi, which lies between Guangdong and Vietnam. A quarter have moved to other Asian countries such as Vietnam, India and Myanmar, while the remaining 25% have shut up shop but are undecided about their next move.
Hong Kong businessman Leung said: “No one wants to leave, but we just couldn’t go on doing business.”
mheck82 • February 4th, 2008 at 9:31 am
The natural interest rate dominated demand/savings relation doesn’t work, if there are completely different demographics on the work.
Countries with rapidly aging populations have to save, even for negative real interest. The US has a relatively favourable demographics and therefore imports more, together with e.g. India or France in Europe.
The real anomaly is in the Arabian world, where the population grows rapidly without a huge trade deficit. Several oil exporting countries could now invest huge sums in infrastructure and in renewable energies, which would make them energy exporters even when the oil is gone. But they don’t do it. I think globally there is the most “unfunctional” market.
Dave Chiang • February 4th, 2008 at 9:38 am
China’s State-owned SWF to buy $2 billion stake in Australia Fortescue Metals
http://www.forbes.com/markets/economy/2008/02/04/fortescue-china-iron-markets-equity-cx_jc_0204markets1.html
Its $200 billion sovereign wealth fund, China Investment Corp., and coal miner China Shenhua Group are reportedly in talks to take a sizable stake in Fortescue Metals, a major Australian iron ore producer that is building its own rail line in Western Australia to the sea.
The news comes on the heels of a stunning share raid Friday by Alcoa of the U.S. and Chinalco in which they took a joint 12% stake in Rio Tinto, putting them in position to potentially block a takeover of the miner by BHP.
Hong Kong’s South China Morning Post that claimed China Investment Corp. and China Shenhua, China’s largest coal miner, were seeking to buy a 15.85% stake in Fortescue Metals for about $2 billion.
London’s Sunday Telegraph also reported over the weekend that state-controlled China Development Bank had expressed interest in buying a 35% stake in the miner Xstrata from Swiss commodities firm Glencore.
State-owned China Development Bank financed Chinalco’s involvement in its joint $14 billion share raid with Alcoa on Rio Tinto.
alexcanuck • February 4th, 2008 at 9:50 am
I am unable to access comments and full entry over on the Professors blog. Anyone else with this problem? Site shows me logged in. I don’t post too often, but sure do listen hard. Lot of good info, few trolls, real insights, no paid shills. I miss you guys. I certainly respect and read Brad Setser, but find the comment thread is (rightfully) more on topic. Usually that’s a good thing, but the comments on the Professors blog has a life of it’s own. I think the ongoing discussion there is unique and greatly appreciated!
Stormy • February 4th, 2008 at 10:01 am
I just don’t see adjustment coming smoothly–or at all willingly.
David’s reference to the shoemakers hits the target, I think. Policies are not in place to increase consumption in developing countries. As costs rise…or as cheaper labor can be found elsewhere…then business move on to the next pit stop deeper in the hinterlands.
Yes, the contraction of the U.S. consumer will have an effect. But who will pick up the slack and how?
“Workers leaving tradables production in the US (and manufacturing in particular) had to [be] absorbed elsewhere in the economy.”
And so it was: government jobs, health care, service industries—not exactly a great recipe for GDP.
If David’s example is indicative of other industries in China, what happens then? Do we just keep chasing cheap labor around the world, all of which feeds the gluttonous U.S., which now, it appears, must go on a diet?
I really fail to see the logic in this kind of globalization.
Alexcanuck,
I have the same problem repeatedly. Is this intentional?
Guest • February 4th, 2008 at 10:24 am
Roubini’s blog is now closed to comments from non-subscribers. Only Setser’s remains open. This is universal, not anti-Canadian.
BSNEATH • February 4th, 2008 at 10:38 am
$600 Billion – Nearly the annual amount of Mortgage Equity Withdrawls.
Guest • February 4th, 2008 at 10:59 am
Fact is that shrinking US consumption probably requires a recession, perhaps a prolonged one. And if you keep stimulating the economy to avoid one you aren’t going to get any shrinkage. Another fact is, apparently, that the US won’t take the medicine it needs to recover. It prefers to be a chronic over=consuming invalid. One feels no sympathy for such a misguided nation.
Shrek • February 4th, 2008 at 11:03 am
I think Stormy’s scenario is the most likely outcome.
Nicolas • February 4th, 2008 at 11:16 am
Here we are in the middle ages in 2008 with candidates invoking God or Jesus etc.
It was Shakespeare who said never trust a politician who mentions the word God.
God should also have saved the world from the sub prime mess and should make consumers wealthy enough to spend millions to help the economy.
Guest • February 4th, 2008 at 12:07 pm
@alexcanuck “I am unable to access comments and full entry over on the Professors blog. Anyone else with this problem? Site shows me logged in…”
Same problem. I believe the blog wants you to re-register; once you do that, it gives you access. No one is posting: I believe all are in the same conundrum — to quote Greenspan. And, by the way, the original e-mail with my password was gone from my Inbox. I found it in my address book. Good luck! I would subscribe to a portion of the RGEMonitor if it were available for $400 or less. But $3000, if that’s the price, is too steep for a one-man operation.
RebelEconomist • February 4th, 2008 at 12:09 pm
I am on the same lines as mheck82. What if China’s heavy saving is intertemporally optimal, and the US lack of saving is not? It seems to me that it is necessary to have a view on that before urging China to save less. China already seems to be investing as much at home as feasible, although it could arguably spread its overseas saving pressure by buying reserve assets from a wider range of countries (eg yen). But perhaps the US could help itself, as well as accommodating Chinese saving, by investing more at home. In my view, the US has not been using its exorbitant privilege wisely.
Guest • February 4th, 2008 at 12:52 pm
@Stormy to Alexcanuck: “I have the same problem repeatedly. Is this intentional?”
I know “the problem” would not be intentional on Roubini’s part (he puts a lot of time into his Blog and it has brought him populous fame); but he is becoming a very sought and potent expert contrarian to financial hyperbole, and “it” happens.
According to a January 27 program on NPR, “Hacker Target Scientology Web Sites”:
http://www.npr.org/templates/story/story.php?storyID=18460759
“Online hackers are using a simple but effective technique called “distributed denials of service” to bring down Web sites. The idea is to flood the target site with so much traffic, that it overwhelms the server.
“A group of hackers called “anonymous” has been using this tactic against the Church of Scientology. Their problem isn’t with the religion, they say, but the content of information.
“Andrea Seabrook gets the story from Ryan single of Wired.com and Keith Laslop of the internet security company Prolexic.”
I understand from the program that something like 8,000 to 10,000 sites are being targeted worldwide at the present moment (I’m going on memory).
Related NRP program are Dec. 17, 2007 – Mac Computers Increasingly Targeted by Hackers; Oct. 23, 2007 – Hackers Stall Ticket Sales for Rockies Games; Jan. 20, 2008 – Cyber Sleuths Zero in as Web Fraud Takes Toll; Jan. 13, 2008 – Cyber Crime Transforms Legal Landscape.
As 29% or more of adult Americans now get their news solely from the Internet, opposition is setting in. See: “Mainstream Media to Bloggers: Bug Off”:
http://www.smirkingchimp.com/thread/4797
Guest • February 4th, 2008 at 1:20 pm
If US consumption needs to grow more slowly than income, what would drastic cuts in military expeditures do to US consumption? Could cutting military expenditures, say, by 75% reduce consumption enough? See Chalmers Johnson on US guns+butter policies:
http://mondediplo.com/2008/02/05military
The guns part could certainly be cut drastically with no adverse affects for 99% of Americans.
bsetser • February 4th, 2008 at 1:27 pm
rebel — my view is that china’s current savings rate is not optimal, even given China’s aging. over the past few years, China’s savings rose by abotu 15% of China’s GDP, so to view the current level as inter-temporarily optimal you would necessarily have to think its previous savings rate was way too low.
put differently, i don’t think China’s current consumption to GDP rate of something like 35% of its GDP is optimal, and conversely, the us level is above optimal.
tho in the us case, i would rather not fall back to optimal in a single move.
gillies • February 4th, 2008 at 2:34 pm
i have consistently held the view that the helicopter magic will not work. suppose that i am wrong – does anyone have a view on what the next bubble would be ?
how about the price of corn / beef / food / ethanol ? the whole ethanol game cuts oil imports to the u s, competes with food crops, raises the export price of grain or any crop to which ethanol crops are a better paying alternative. food is presumably something of which demand is inelastic.
there are futures markets to provide a new playground for wall street and speculators, and ‘green’ excuses to put in the political shop window. there are ethanol subsidies to use as political leverage with the new industry, which might even consider campaign contributions in future elections.
it would not be in the nature of the current administration to say – ‘tighten your belts.’ nor to cut back military spending. so what scenario will they concoct ?
there was a madness in the housing bubble. now the ‘you have been approved for . . . .’ e mails have stopped coming. so no one is going to reflate that one. it’s not going to be tulip bulbs, either. i am guessing food is coming next. fashions change.
any views ?
.
Dave Chiang • February 4th, 2008 at 3:59 pm
The level of saving in the US economy will have to increase, and this will come at the cost of economic growth, which over the last decade has depended on ever-greater levels of consumer debt. Unfortunately, Bernanke’s irresponsible rate cuts to bailout leveraged Hedge Funds may impede the return to normality by hurting savers and forcing them to save more for longer, thus dragging out the downturn. The Federal Reserve should be abolished and replaced with interest rate indexing to the “real” inflation rate.
Yields of money-market funds have been sliding since the Fed began a series of rate cuts in September to jump-start a slowing economy. The average seven-day yield for taxable money-market funds has dropped to 3.4% from 4.7% since then.
It gets worse. The Fed has slashed rates twice in the past 10 days, and those cuts have yet to be fully reflected in money-market-fund rates. By the end of February, the average taxable fund yield could be around 2.4%, says Connie Bugbee, managing director of iMoneyNet, a money-fund research firm.
artichoke • February 4th, 2008 at 4:37 pm
DC if savers have to save for longer, isn’t that what the economy needs (according to your first sentence?) It may be unfair to them, but in your scenario, cutting rates actually has two beneficial effects:
1. It reduces the FX value of the dollar thus depreciating our international debts vs. other currencies, and
2. It induces additional saving at the expense of consumption.
Our policy makers sure hope you aren’t right about #2. They want people to spend their “rebate”. Even the WSJ is pushing people to buy stocks rather than retire debt if they received a bonus, in an advice column published over the weekend.
artichoke • February 4th, 2008 at 4:42 pm
@gillies: It’s hard to bubble food because it’s perishable. Bubbles tend to be for long-lived assets that _could_ be worth a fortune sometime in the future so you’d better buy now! Tech stocks, houses, etc.
Even tulip bulbs are long-lasting until you plant them.
But food prices are going up and there’s going to be starvation scares because of it in some parts of the world. It shows how inelastic the supply of food is that this is happening already and most of the biofuel talk is still just talk.
Gloomy • February 4th, 2008 at 5:19 pm
Unfortunately only Huckabee “gets it”. Only divine intervention could prevent a worldwide depression at this point. Any other conclusion is just wishful thinking. I wish people would admit this to themselves and then aloud so we can deal with the inevitable.
mark greenberg • February 4th, 2008 at 6:47 pm
I disagree with both you and Roubini, who defend the administrations stimulus package and the Fed’s aggressive loosening. Its a recipe for more froth.
disgruntled observer • February 4th, 2008 at 6:57 pm
Re: What comes next. I would hope that it would be a green tech roll out. Retrofitting of housing stock would create lots of manual labour jobs.
As a non-economist, might I offer some ecological analogies. The first refers to disrupted successional ecology, which uses the r – k continuum as its model.
“r” represents fast growing, short living species which reproduce early, frequently and abundantly, with wide seed dispersal. Typically in a forest tree species, it is hollow or at least very soft wood, which propogates itself by colonising new/disturbed terrain as opposed to the forest floor beneath the species. It is a pioneer species that nurses slower growing “k” species by casting little shade. Typically it blankets an area so that it appears even aged and homogenous. It is also highly unstable and requires copious quantities of water to survive. Essentially it thrives in an environment of abundant and cheap resources. Easy and cheap access to the sun (oil) and water (liquidity).
The “k” species is long living and slower growing. It typically exists in mature diverse forests, and reproduces slowly according to appropriate environmental conditions. Accordingly its seeds are large and represent a considerable investment. Similarly it is stable, having invested in strategies to ensure longterm survival in adverse conditions. It propogates itself within a relatively short distance from the parent tree within the understory and struggles away waiting for the canopy to open up.
Forest ecology suggests that communities move from the pioneer “r” species to the mature and diverse “k” species. Whilst r-k is not an all inclusive construct, it does provide a useful base for understanding how communities, societies, economies evolve. The US to my mind appears to be going through a sharply disrupted succession. It has chosen to exist on the continuum closer to the “r” end, with its high growth rates, high mobility of its enterprises, hollowed out base and lack of investment in stabilising mechanisms which make it clearly unstable. Further, it is unable or unwilling to sustain a shock dry period of reduced liquidity.
China appears to be attempting to rapidly progress from r – k, building up a diverse industrial base, although better redistribution of income would aid it greatly, whilst Europe with its slower growing and more diverse industrial base with high investment rates, and more efficient and equitable distribution of income (I’m sure some will debate that vociferously), has opted for a strategy closer to the k end of the continuum.
As for the financial aspects of the economy, there is another ecological analogy that it fits nicely into, but I’m out of time for the present.
I will however thank you Dr Setser for an excellent blog. I don’t understand a lot of what is said on these pages, but I have a basic framework within which I can place things.
bsetser • February 4th, 2008 at 7:16 pm
ecologist — many thanks for your kind words, and the interesting analogy. I need a bit more time to digest it.
mark greenberg. we will see where the us ends up on the “more froth” v “avoiding falling off a cliff” spectrum. martin wolf is closer to “too much risk of froth” side than I am. tis an interesting experiment to see if a major borrower can pursue aggressive counter-cylical policies.
Qingdao • February 4th, 2008 at 7:38 pm
Brad: I hope you will have more to say about the recent WB report, which argues: “it does not seem that inflation is due to excessively loose monetary policy.” (p. 6) “China’s inflation is currently largely driven by food prices.” (p. 10) If that’s true, all they have to do is buy Kansas wheat and hogs with their $1.5 trillion. But: “ inflation. . .is the issue that currently concerns policymakers the most.” What? They can’t fix a short-term shortage of pork? Ref. the Economist: my understanding is that they believe it is a myth that investment and exports drive Chinese economic growth – domestic consumption drives economic growth. World Bank: “Overall investment growth in 2007 overall (sic) was only moderately lower than in 2006, and it continues to be higher than consumption growth, thus increasing its share in GDP.” (p.3)
Anonymous • February 4th, 2008 at 7:49 pm
Next bubble? Already present and accounted for.
BONDS.
FG • February 4th, 2008 at 8:57 pm
DC: Bernanke’s rate cuts and the government stimulus package are perfectly responsible as long as they can assume that someone will buy dollars at a loss.
As Bill Gross puts it:
“If you’re offered a new home with nothing down and nothing to lose, you’d take it and many Americans did. If you’re offered a new car with 0% financing for 5 years, you’d buy it and many Americans still do.”
What’s irresponsible is to fight economic balance and let forces accumulate until the point they become irrepressible. That’s what China is actively doing.
disgruntled observer • February 4th, 2008 at 9:58 pm
“What’s irresponsible is to fight economic balance and let forces accumulate until the point they become irrepressible. That’s what China is actively doing.”
I will presume that the comment by FG is mirroring Dr.Setsers view, that exchange rate manipulation by the Chinese is to blame for the global imbalances. Might I ask however, which is truly important, the nominal or real exchange rate? My basic understanding is that whilst the nominal rate may be controlled, the real exchange rate is determined by economic forces outside of the control of gov/central banks: absent nominal appreciation, inflation being the mechanism through which the real rate adjusts?
The conundrum as put forward is that there hasn’t been the inflation that would be expected in such circumstances, essentially meaning that by controlling the nominal rate the real rate has also stayed fixed. Would that be a fair reading of the situation?
If that is the case, could it then be true, that China is by virtue of its sheer size a bite that the US couldn’t chew? I.e. that it is essentially playing the same game as the US but in a different manner. The US has opted for offshoring to control inflation, (whether by accident or design), by using global wage arbitrage, and that China is simply in the envious position (depending on your point of view) of having the same arbitrage process within its borders. Essentially it is beating the US at it’s own game.
Could it be that absent any shift from China – which is unlikely, and IMHO their choice to make, foolishly or otherwise – the necessary adjustment is deflation in the US? Or maybe internal wage arbitrage in China has just yet to reach its limits, as it has done with the US. It sure does seem that way, considering the story above about the shoe industry.
One other question: Would it have been possible to prevent such an extreme scenario if there was better wealth distribution and regulation in the US system? Less requirements for subprime loans and credit, more savings, less need for a slack monetary policy, less inflation (reducing the need for so much off-shoring), etc? It’s striking that this crisis appears to be primarily an anglocentric crisis.
Qingdao • February 4th, 2008 at 10:36 pm
Those who think inflation is caused by too little pork rather than too much money are wrong.Rogoff in todays FT.
bsetser • February 4th, 2008 at 11:24 pm
observor –
Martin Wolf has explained this all better than I could.
He makes two points:
First, in the short-run, controlling the nominal exchange rate can control the real exchange rate. Inflation emerges, but with a lag.
Second, if the government adopts policies to restrain demand growth in the face of inflationary pressures, it can slow inflationary real exchange rate adjustment for even longer — and in the process, drive up the savings rate (or restrain investment, increasing the current account surplus for any given level of savings). I think this is what has happened in China — lending curbs have reined in investment (hard as that may be to believe), keeping negative real rates for spurring an even bigger boom, undistributed SOE profits have reduced demand for bank lending (And increased savings) and the government’s fiscal balance has improved. all helped contain pressure for inflationary real adjustment. Something similar happened in S. Arabia — so long as the govenrment didn’t spend the oil windfall (increasing savings), it could avoid inflationary adjusment (especially with controlled domestic energy prices).
Qingdao — I will be writing about the WB report. I greatly admire Dr. Kuijs work, but i have a slightly different take on the “inflation” issue — to me, it also reflects some of the pressures now present for faster real adjustment. But no doubt there will be a vigorous debate on that point.
disgruntled observer • February 4th, 2008 at 11:35 pm
Thanks for your reply
RebelEconomist • February 5th, 2008 at 3:36 am
FG: You (and maybe Bill Gross too) seem to be assuming that it is irrational to save if interest rates are zero. This is incorrect; it depends on what the future holds. When the squirrel in my garden buries nuts in autumn, it is not doing so with a view to growing trees!
RebelEconomist • February 5th, 2008 at 3:47 am
As one who has expected the boom in agricultural commodities to continue, the following FT article, which argues that food prices are set to fall, gave me food for thought 
http://www.ft.com/cms/s/0/f8db112e-ced5-11dc-877a-000077b07658.html
groucho • February 5th, 2008 at 6:01 am
Brad, what’s your take on the upcoming Tokyo G7 pow-wow?
” If the medicine is strong enough and if it’s done in conjunction with other governments, then I think you have a real possibility to stabilize the situation and make it better,” Thomas Russo, vice chairman of Lehman Brothers Holdings Inc. in New York, said in a Bloomberg Television interview Jan. 24. “If the medicine isn’t effective or strong enough, you’re in for a real downturn.”
Russo proposes offering government-backed loans to U.S. homeowners with adjustable-rate mortgages, whether prime or subprime. He also advocates a tax credit for people who buy homes this year that would triple the current benefits mortgage holders receive.
Stephen King, chief economist at HSBC Holdings Plc in London and a former U.K. Treasury adviser, says the crisis may get so severe that governments will be forced to bail out homeowners who fall behind on loan payments and to buy up worthless assets that are hurting banks.
Unblocking the System
“In a world of monetary drought, cutting interest rates alone is unlikely to unblock the system,” King says. “Larger budget deficits are likely to be an increasingly common feature of the policy-making landscape.”
Bernard Connolly, global strategist at American International Group’s Banque AIG unit in London, even predicts authorities will eventually have to buy up stocks to prevent a crash.”
gillies • February 5th, 2008 at 1:58 pm
disgruntled observer – keep talking. many economists know that they are the most ‘numerate’ profession but suffer from an extreme poverty of imagery. this site is open to non specialist comment. the ‘succession of species’ image is a useful one. contributors on the site have responded well to novel imagery in the past.
i would like to add this – heavy borrowers are an early invasive species in new territory. heavy savers are a slower growing longer lasting successor species. escalating property prices open up new territory to borrowing strategy species. contracting property prices starve them out.
.
df • February 6th, 2008 at 1:11 am
Brad, thanks for highlighting that consumption/GDP ratio.
After all these years, i still think the main ratio is debt/gdp.
You could have balanced international trade, consumption on par with GDP (harder) and still be in trouble if your debt grows faster than your GDP.
In the present world of course that means the world money supply should not grow faster than the world GDP (since 95% of the money supply is debt money, created by private agents).
What the Fed may be trying and should try is to raise the ratio of Fed dollars (cash, increased lending to the government)/ debt based mone.
If that works, then inflation can follow and the debt levels be erased somewhat smoothly.
But for that the Fed should lower rates, lend to the government and lobby so that lending standards get strengthened, the financial industry regulated.
If the Fed really wanted they could be buying those damn treasury bonds and the chinese would be forced to trade their dollars for RMB.
Same for the ECB.
Basically to me the thing is simple : too much debt (rest follows), meaning too much privately issued money.
Answer :
Put brakes on private lending to curb privately issued money, compensate with massive money emissions from the central banks.
In short SCREW the shareholder big time. Back to keynes our hero in debt deflation times.
STS • February 7th, 2008 at 1:21 pm
disgruntled:
ditto gillies’ remark above. economics could stand to absorb some interesting models from biology.
The fact that Chinese shoemakers are moving away from the fast growing coastal regions and back to poor parts of the country (or indeed to Vietnam) isn’t necessarily bad news (though it’s undoubtedly painful for those moving). The Chinese boom towns are the places where domestic consumption can most readily start increasing.
We need an adjustment where tapped out American consumers aren’t pulling the global economy along. To replace slackening US demand, we need fast growing economies elsewhere (notably China) to get “in harness” as drivers of global demand. As they do, the US dollar will continue to decline which will tip incentives for American businesses and workers to get involved in tradable goods & services rather than the financial shell-games (writing bad mortgages, brokering bad real estate transactions) and housing construction which are imploding right now.
df • February 8th, 2008 at 9:56 am
sts it s too late for that.
China and others are too dependant on exports to the western world. We are where the export led growth mantra of the IMF WORLD BAnk led us : deep in the shit.
