china and exchange rates

[griftadan]

as everyone watches while the world economy goes to hell, whats often noticed is the global unbalance in production and consumption that has been seen recently. current account (national income income minus consumption, investment and government spending) and trade deficits in developed nations are contrasted by current account and trade surpluses in the developing world, most notably china. many point to china's blatant domestic currency manipulation as one cause for this, but few are connecting this established trend to the recent financial problems which started in the US. people blame the banks, the mortgage holders, security fund managers etc.. here while failing to notice what hand currency manipulation in china may have in this.

currently, china's blistering economic growth due in part to a surge in exports can be attributed to china's ever depreciating currency, the yuan. in international trade, a country with a depreciating currency will experience growth in exports because foreigners looking to buy products abroad and import them to their own country will get better value for their own currency when they go to exchange it in the country they're buying from, thus increasing the incentive to buy in a country with depreciating currency. china does this deliberately in a few ways, namely by regulating the exchange rate between the yuan and the US dollar to always be depreciating against the dollar they also continuously buy buying US treasury bonds which also causes the yuan to depreciate further and lowers the federal savings rate because more bonds are being issued. a decrease in interest rates in the US also raises consumption as savings is viewed as relatively less lucrative so the alternative is exercised more frequently.

this sets up a situation where were importing and consuming more than we would otherwise, and exporting less then we would otherwise, as well as saving less. the result is a negative savings rate, illustrated by a current account deficit. considering the current debacle started with people defaulting on loans, it may be extrapolated that perhaps a foreign countries policy which causes our national savings to reduce is at least partially to blame.

a massive correction in consumption and savings in developed countries is in order, but it's going to be difficult with countries like china trying to purposely keep that from happening. the chinese government has a huge incentive to keep this sup however, as the export driven economic growth is largely whats maintaining social stability. seriously, their GDP growth may drop below 5% this year (great number for most countries), and that would be considered a serious economic downturn and threaten to create large amounts of dissent. whether or not this is good for china is somewhat besides the point as the rest of the world can't afford to continue on the current path, so retaliatory import tariffs may be in order to pressure china into stopping its currency manipulation. people often point to the smoot hawley act as a classic example of tariffs going wrong in time of recession, however there is very little china can do to respond that won't prove disastrous for their economy. they are the one who depend on inflated exports for political survival, import tariffs will hurt them much more than import tariffs from them would hurt us.

obamas new treasury secretary tim geithner recently called for a stop to china's currency manipulation, stronger action will probably needed. china pretends like they aren't even doing anything at all, and are demonizing him in the local media.

http://www.economist.com/finance/displayStory.cfm?story_id=13005072&source=most_commented

[Iskandar]

a massive correction in consumption and savings in developed countries is in order, but it's going to be difficult with countries like china trying to purposely keep that from happening.How would this be possible, though?

[siva_chair]

I don't see how we can criticize China for currency manipulation with a straight face when we are sitting here doing it as well.

And the Fed's policies have been depreciating our currency for far longer.

[griftadan]

How would this be possible, though?

by lowering consumption and raising savings or income. yes, it's going to suck but it's going to happen.

I don't see how we can criticize China for currency manipulation with a straight face when we are sitting here doing it as well.

And the Fed's policies have been depreciating our currency for far longer.

yeah the fed needs to be more disciplined, that said what the fed does can't really compare to what chinas doing it's not like were really benefiting at the expense of other countries.

[Iskandar]

How do we lower consumption though? Through tariffs or some BS like that? I'm honestly curious because this is a side of economics I know comparatively little about.

[siva_chair]

How do we lower consumption though? Through tariffs or some BS like that? I'm honestly curious because this is a side of economics I know comparatively little about.

Well for starters we could raise the artificially low interest rates set by the Fed.

And "stimulus packages" certainly don't help.

[Iskandar]

Stimulus is intended to raise consumption only for the purposes of stimulating the economy. At the present time that concern outweighs all others.

[siva_chair]

Stimulus is intended to raise consumption only for the purposes of stimulating the economy. At the present time that concern outweighs all others.

Too much consumption and not enough savings is part of the problem!

[griftadan]

How do we lower consumption though? Through tariffs or some BS like that? I'm honestly curious because this is a side of economics I know comparatively little about.

being poor because of a recession might do the trick momentarily, but in the long run:

the fed needs to be more responsible with interest rates so as not to over encourage consumption by cutting rates, and we need to find a way to stop china's shenanigans. tariffs could help to pressure china as i mentioned above, and it would also increase government revenue which will overall add to national savings. the cost of tariffs are usually split between the exporter and the consumers, but with a large market like the US the exporter will bare more of the cost

[griftadan]

Too much consumption and not enough savings is part of the problem!

it is, although i'm not sure whether it's better or not to face that issue during a recession or when the economy is on the upswing and a stimulus pack might help us get there. if we can get in good shape we can start to scale things back, i'm not sure we could pull that off right now.

[Iskandar]

China's refusal to play fair aside, reviving the economy is foremost right now. Problems like overconsumption will have to be put on the backburner until then. That's how I see it at least as I'm not an economist.

[griftadan]

i think i agree. while over consumption probably made the bubble burst worse, at the moment the debt might not hurt us as bad.

[siva_chair]

yeah the fed needs to be more disciplined, that said what the fed does can't really compare to what chinas doing it's not like were really benefiting at the expense of other countries.

Well actually we are (or I should say some are), because inflation is good for debtors, and the US is the largest debtor.

it is, although i'm not sure whether it's better or not to face that issue during a recession or when the economy is on the upswing and a stimulus pack might help us get there. if we can get in good shape we can start to scale things back, i'm not sure we could pull that off right now.

The recession is the cure to all this, though. The market is correcting itself from the loads of malinvestments. We, as a nation, have obliterated our savings, and spending more and going further into debt is not helping us at all.

China's refusal to play fair aside, reviving the economy is foremost right now. Problems like overconsumption will have to be put on the backburner until then. That's how I see it at least as I'm not an economist.

There won't be an economy to revive if we keep digging ourselves deeper into debt. Real wealth comes from savings.

[Iskandar]

No, investment is more important in the long run.

[griftadan]

Well actually we are (or I should say some are), because inflation is good for debtors, and the US is the largest debtor.

i think places creditors like china welcome marginally losing out on there treasury bonds if it means further perpetuating US consumption of their goods

The recession is the cure to all this, though. The market is correcting itself from the loads of malinvestments. We, as a nation, have obliterated our savings, and spending more and going further into debt is not helping us at all.
There won't be an economy to revive if we keep digging ourselves deeper into debt. Real wealth comes from savings.

it might if it makes the process more bearable while only marginally expanding our debt, the stimulus itself won't cause any sort of collapse and debts become much more manageable when the economy is better.

[siva_chair]

No, investment is more important in the long run.

And what are you investing with if you are broke?

Savings encourages investment, as real wealth is created.

i think places creditors like china welcome marginally losing out on there treasury bonds if it means further perpetuating US consumption of their goods

China isn't going to keep buying up our debt endlessly. They are only going to take IOU's for so long, especially if we keep debasing our currency to where the trillions that they are holding become more and more worthless.


it might if it makes the process more bearable while only marginally expanding our debt, the stimulus itself won't cause any sort of collapse and debts become much more manageable when the economy is better.

But the economy will not be better. What is your average person going to spend their stimulus on? More goods probably made in China. I fail to see how more consumption is going to help. We already consume too much.

[Iskandar]

And what are you investing with if you are broke?

Savings encourages investment, as real wealth is created.Chicken-egg question. You can't get substantial savings without people investing in something first, and hoarding savings instead of injecting that money into the economy doesn't do much good either.

[siva_chair]

Chicken-egg question. You can't get substantial savings without people investing in something first, and hoarding savings instead of injecting that money into the economy doesn't do much good either.

Umm when people save it creates wealth that is invested. You can't invest without someone first saving (in our case we are investing in debt that the Chinese are buying up, so we are really investing their savings).

[Iskandar]

Hoarding wealth isn't economic growth. What?

[siva_chair]

Hoarding wealth isn't economic growth. What?

Hoarding wealth isn't what is meant by savings. I thought you said you took an economics course?

[Iskandar]

Savings don't benefit anyone unless they're spent, e.g. through investment. I studied mainstream economics, so it might work differently in the Austrian's version of reality, I don't know.

[siva_chair]

Savings don't benefit anyone unless they're spent, e.g. through investment. I studied mainstream economics, so it might work differently in the Austrian's version of reality, I don't know.

How do you think interest is earned?

Savings provides the means to which entreprenuers can invest. That is where they borrow their money from for investment. Investment comes from real savings (from depositors) and demand for those savings on the part of borrowers (investors).

You studied a farce. I'm sorry but you were indoctrinated with a load of bullshit.

[Iskandar]

Mainstream economics is bullshit?

[siva_chair]

Mainstream economics is bullshit?

Most of it, yes. I have no problems saying that.

[pooble]

Savings don't benefit anyone unless they're spent, e.g. through investment. I studied mainstream economics, so it might work differently in the Austrian's version of reality, I don't know.

well, saving simply means you arent consuming, i.e. you are diverting present consumption for the future so that you can make more productive uses of those resources.

"austrian" and mainstream economics does not differ on this. the first thing you learn in any class is in order to invest you must save, in order to save, you must divert present consumption.

[griftadan]

Savings encourages investment, as real wealth is created.

part of current account deficit is investment. CA = Income - Consumption, Investment, and Government Spending. while it's likely that our deficit is largely consumption based, investment could be part of it too.

China isn't going to keep buying up our debt endlessly. They are only going to take IOU's for so long, especially if we keep debasing our currency to where the trillions that they are holding become more and more worthless.

well if you read what i wrote in the OP you would probably understand that china has a real interest in doing this for a long time regardless of their investment depreciating. the main thing they care about is keeping US consumers spending, and collecting interest payments isn't too bad either. the only way they stop is probably if we stop making the interest payments, US government credit is still AAA rated.


But the economy will not be better. What is your average person going to spend their stimulus on? More goods probably made in China. I fail to see how more consumption is going to help. We already consume too much.

that's not really the extent of the stimulus pack though, there's also infrastructure investment projects that should help, and it's not like the bulk of US consumption is spent abroad. wants the financial markets inevitably stabilize and further liquidity is established the stimulus should see some effect. once we enter into positive GDP growth, we can focus on debt and CA deficits.

[WhoDidTheElf]

What are we defining consumption as in this thread?

[siva_chair]

part of current account deficit is investment. CA = Income - Consumption, Investment, and Government Spending. while it's likely that our deficit is largely consumption based, investment could be part of it too.

The vast majority of our consumption is not investmet, but consumption of consumer goods.

well if you read what i wrote in the OP you would probably understand that china has a real interest in doing this for a long time regardless of their investment depreciating. the main thing they care about is keeping US consumers spending, and collecting interest payments isn't too bad either. the only way they stop is probably if we stop making the interest payments, US government credit is still AAA rated.

Well this will change if we keep devaluing our monetary supply through inflation (bailouts anyone?) at the rate we are. It would become far to costly for China to continue to finance our debt. Pretty soon it will be in China's interest to unpeg their currency to the dollar (as well as it will be for other nations to do so as well).


that's not really the extent of the stimulus pack though, there's also infrastructure investment projects that should help, and it's not like the bulk of US consumption is spent abroad. wants the financial markets inevitably stabilize and further liquidity is established the stimulus should see some effect. once we enter into positive GDP growth, we can focus on debt and CA deficits.

Most US consumption is spent on imported goods, though. 72% of our economy is based on consumer spending, and most of that goes towards goods manufactured in China and other parts of the world.