|
|
By David Howden, on 15 November 11
One can read The Daily Mail for its coverage of the royal family, snapshots of British life, or, if you are like me, the headlines. On Saturday, guest contributor Ian Morris, Professor of History and Classics at Stanford University, served up this classic example:
The perils of the begging bowl: Exactly 100 years ago China was ‘rescued’ by European loans. The result was a century of misery. Now the boot is on the other foot.
Morris continues to explain that 100 years ago, in 1911, the last emperor of China had just been toppled. The newly formed Republic of China was penniless (yuanless?), and desperate for loans to keep it afloat. European investors, flush with cash in what was the still prosperous pre-World War I era, flocked to Beijing to make loans to keep the newborn country afloat.
Today the eastward journey continues, but it is not made by Europeans looking to invest their savings. It is instead European politicians looking to secure loans to keep their unsustainable experiments afloat for a little while longer. While this great European experiment with the welfare state is now obviously insolvent, an attitude remains that we are only in the midst of a liquidity crisis. This view is wrong. No amount of loans can save a country from a crisis of insolvency, as has proven to be the case in Greece recently.
A more important question to ask is whether Europeans should be seeking bailouts to keep the current system afloat.
The Republic of China, formed in 1912 supported by European funds gave way to The People’s Republic of China in 1949. The latter demonstrated itself to be the most despotic regime of the twentieth century. The impoverishment of citizens by other regimes, Nazi Germany or Soviet Russia, pale in comparison to the hardships endured by the hardworking Chinese over the last century.
Several centuries ago, China was the most prosperous nation on Earth, far exceeding even Europe in terms of wealth and technology. The Industrial Revolution changed this, but China still managed to maintain its competiveness, particularly by trading with the newly arriving European entrepreneurs as shipping improvements made trade between the continents increasingly possible during the 19th century.
The loss of the Emperor in 1911 set in motion the key steps that would place the nation’s future in the hands of its eventual tyrant leader, Chairman Mao. Funds provided by wealthy European investors fomented this shift, allowing freshly flailing regimes to secure a political foothold in the late teens and early 1920s.
One must ask, with the fortune of hindsight, whether such financing was beneficial. Fostering what would later become a tyrannically regime must surely be viewed with less than rose-coloured glasses today.
The European states may not seem tyrannical in comparison to China. The point is that they are examples of countries with failed policies. One must ask if searching for ways to continue these erroneous policies is beneficial for the Europeans that must live with them. Europeans with an eye for history need only look at a similar policy pursued 100 years ago for the answer.
By Alasdair Macleod, on 6 November 11
The basic market problem is there is too much sovereign borrowing for the money available, which would normally drive interest rates sharply higher. Some countries have got round this by printing money while pretending they are issuing bonds. A few countries are unable to do this, because they lack their own printable currencies. And that is the root of the problem faced by the weaker eurozone members.
This problem for some of them has become so acute that they cannot now fund their deficits. What is less obvious is that these highly-indebted states also have to roll over existing debt as it matures. Traditionally this debt has been absorbed on a replacement-basis in the markets, but that only works as long as the markets are fundamentally confident, which they are no longer: the inability of the political classes to resolve their difficulties has seen to that. Therefore, as bonds mature, investors and banks are unlikely to re-invest, preferring cash. Even if the weaker states are able to fund redemptions, from an expanded European Financial Stability Facility (EFSF) for example, this will be used to reduce euro-denominated bank credit and improve capital ratios.
This need not be a bad outcome, because the economic effect is to simply transfer the funding of sovereign debt to the EFSF. The question is who is going to fund the EFSF, which with its gearing is a risky proposition? There are only two possibilities: the ECB (which should not be assumed at this stage) and those with trade surpluses to recycle, particularly China. And since she is the only major source of this potential funding in the running, she is in a position of enormous negotiating power.
Looking at the proposition from China’s viewpoint is instructive. She is being asked to bail out profligate nations, who have run out of credit and whose citizens enjoy a far higher standard of living than their own. It amounts to a position of power ahead of her economic development. Furthermore, China’s economists were brought up with the Marxist dictum, that capitalism ultimately destroys itself, so they are being invited to merely delay something that is inevitable. Will they fund the EFSF? Beyond perhaps a token amount, it seems unlikely. But will they stand back and let Europe sink? That would be a missed opportunity to wield her enormous power, and we need to give this thought some historical context.
The one thing the Chinese have learned is that they cannot guarantee their own security through military means alone, they also require economic strength. This was the reason old-style communism failed. It has taken them only thirty years to acquire that strength. To consolidate it, they now seek to eliminate their dependency on the US dollar. Therefore, the price Euroland will have to pay for funding is that either the Chinese are given some control over the euro, perhaps by having permanent representation at the ECB, and/or there must be a material advancement for the yuan in trade settlements. And it is unlikely loans will go through the EFSF, because China will want to set her own terms.
This describes the strength of her position. It remains to be seen how China uses this longed-for escape route from dollar domination, and how she plays a winning hand. Initially, she may wisely play for time, letting the Euroland situation deteriorate further, to get the terms she requires.
This article was previously published at GoldMoney.com.
By Sean Corrigan, on 22 October 11
Despite the general relief which greeted the release of China’s GDP data for the third quarter, as well as the still resilient industrial production data, we could not quite bring ourselves to join in the cheers.
As we all know, the mainstream is all too ready to treat such numbers as an end in themselves, without paying sufficient attention to the informational content involved in lumping together the sprawling, multifarious, activities of millions of people and boiling it down to one, single number — and that according to a methodology which subjectively combines the raw data in order to fit a pre-conceived concept of how an economy actually functions.
Hayek himself took pains to warn of the limitations of this approach in 1963, when he was discussing the great Methodenstreit of thirty years before:-
…it seems as if this whole effort… to ‘scientificize’ economics… were due to a mistaken effort to make the statistically observable magnitude the main object of theoretical explanation.
But the fact that we can statistically ascertain certain magnitudes does not make them causally significant, and there seems to me no justification whatever in the widely held conviction that there must be discoverable regularities in the relation between those magnitudes on which we have statistical information.
Economists seem to have come to believe that since statistics represent the only quantitative data which they can obtain, it is these statistical data which are the real facts with which they deal and that their theories must be given such a form that they explain what is statistically ascertainable.
There are of course a few fields, such as the problems of the relation between the quantity of money and the price level, where we can obtain useful approximations to such simple relations – though I am still not quite persuaded that the price level is a very useful concept. But when it comes to the mechanism of change, the chain of cause and effect which we have to trace in order to be able to understand the general character of the changes to be expected, I do not see that the objectively measurable aggregates are of much help…
Not only is GDP itself, far too overaggregated – and far too Keynesian—in its construction, but in China’s case the problem is not only compounded by the suspicion that the numbers are made to tell the story the Party wishes to tell, but also by the fact that where they are not actually incomplete, they are highly inconsistent.
So, for example, we are told that the year-on-year rate of real GDP slowed slightly to 9.1% from the previous quarter’s 9.5%, yet the nominal figures—so far as we can recast them - seem to have accelerated from 17.9% to 20.6%. Indeed, this last figure would not be inconsistent with the simultaneously reported 23.6% rise in SOE business revenues over the first nine months (of which more in a moment)
If true, this would not only have represented the fastest gain since before the GFC itself intruded, but it would imply a price inflationary component which had accelerated to 10.5% – also the highest in nearly four years and significantly above, and moving in opposition to, the supposedly slowing, 6.1% pace of CPI increase!
In looking for further clues, one finds that, over the spring and summer, nationwide rail freight slowed from its usual 9.5-10% annual rate to a relatively languid level of 6.5%. Electricity usage, too—though more subject to the vagaries of the weather—has been rising at less than 11.5% over the past two quarters, rather than at the more typical 14.0-14.5% registered during recent periods of full-blooded expansion.
But more telling still—and yet another good illustration why the burn-the-furniture-to keep-warm inadequacy of GDP accounting is such a poor gauge of economic well-being—those same SOEs whose revenues we mentioned above have seen an unbroken run of consecutive monthly declines in profit, so far in the second half.
Given that these mighty bastions of the one-party state represent the favoured few, upon whom the available credit is showered, upon whom the best tax breaks and greatest subsidies—as well as the most advantageous resource pricing—is lavished, that is surely a telling statistic, as is the fact that their reported return on equity—of 5.8% – lay below even the official rate of price rises.
So, even as these behemoths have squeezed out their SME competitors—up to four-fifths of whom are reputedly losing money—they have been unable to parlay growing revenues into growing profits, much less yield a positive real return on capital.
On top of this, there have been any number of warnings from among the Party high-ups about the dire state of the export market — sufficient alarm, indeed, having been generated that Premier Wen pledged an ‘essentially stable renminbi’ from now on: in effect, therefore, signalling the end of an appreciation which has led to all sorts of extended currency gambles in places as diverse as Hong Kong’s Dim-sum bond market and the copper warehousing, L/C-manipulating tricks of the shadow importers.
Finally, it should be noted that not only has the stock market closed at its lowest level since the global asset markets began to recover in March 2009, but an accelerated liquidation of industrial commodities is well underway, with materials as diverse as steel, copper, zinc, rubber, cotton, polyethylene, and terephthalic acid all losing 30-40% from their highs, and all setting new multi-month—even multi-quarter—lows in the process.
Far from being ‘ruled out’ by the numbers — as the most credulous of mainstream macromancers have been claiming — China’s hard landing may actually be unfolding as we write, hidden from wider apprehension by the gaudy veil of that one, damnable, statistical fiction which is the stage prop of charlatans and the false comfort of the biddable alike.
China is a prime exemplar of everything we Austrians deprecate, whether in terms of its heavy-handed pretence of knowledge; the fatal conceits of its central planners; its multitudinous suppressions and perversions of the pricing system; or the endemic corruption and influence-peddling which, absent an economically impartial means of allocating means, is the only way to ration scarce resources between competing ends there.
As such, we cannot assume other than it will one day to be revealed to be a heroic disaster; that its attempt to maintain the privileged superstructure of the Party while seeking out a more effective way of marshalling the matériel needed to sustain its all-pervading apparatus will prove to have been the cause of a vast waste of human effort and earthly treasure, even if it has been infinitely preferable to the Maoist horrors which preceded this, the latest grand experiment in socialist Utopianism.
The only professional problem we have with this analysis is the rather crucial one that to be convinced of such an outcome from a grand historical perspective is of precious little use in knowing what or when to buy or sell in the hurly-burly of the fibre-optically fast marketplace in which we operate.
There will undoubtedly prove to be just as much ruin in the Middle Kingdom as there was in Adam Smith’s Britain of the 18th century. Economic law cannot be repealed, but its verdict can often be long suspended, if usually at the cost of a harsher sentence when ingenuity finally fails those seeking to deny its implacable judgement. If the extended nonsense of our own, last four years of swimming against the tide of inevitability proves anything, it surely proves this.
Thus, while we are convinced that the hard landing in China will be more of an asteroid impact than a mere bender of the undercarriage when it eventually arrives, we cannot honestly say that this will be the inescapable result of the nation’s present constellation of difficulties.
In seeking to avoid such a shattering return to earth, the authorities there may yet hit upon new ruses to hide the losses, to defer the final reckoning, and so to sway production patterns and alter input pricing in any manner of unforeseeable ways before they tangle their ankles in a Gordian knot of their own ravelling and measure their mighty length in the dust of human vanity.
Here and now, however, all we are prepared to say is that this COULD be the Big One, but it might also be a lesser, pre-cataclysmic tremblor—much more severe than many of those constructing investment portfolios out of the straw of China’s invincibility can hope to withstand—but, nevertheless, only an ominous reminder of a mighty upheaval yet to come.
What goes for China, goes for its neighbours around the Pacific, of course, so we should not be surprised to see regional air freight falling into the negative column, or US West Coast container imports dropping markedly short of 2010 levels, nor at Taiwan export orders moving decisively below their pre– and post-Crash levels.
In Europe, all of this is playing second fiddle to the ongoing farce of the EFSF negotiations while, in the US, the fiscal arithmetic remains parlous and the arena for a round of vituperative, but ultimately sterile, infighting.
If the burdens of the first region remain yet unalleviated, at least the impasse shows that there are still those who recognise — albeit dimly — that to earmark trillions of euros of the citizens’ money so as to reward both gross irresponsibility on the part of the member states and the cynical exploitation of moral hazard by the barons of the banking boardrooms is as ethically dubious as it is economically suspect. While all the bien pensants may flood the airwaves and stuff their column inches by decrying this as the fault of the characteristically stiff-necked Germans, we can only sigh that a few more of our glorious leaders do not also disport a suitably Teutonic fusion of the cervical vertebrae.
Meanwhile, the situation in America goes from bad to worse. Indeed, the US deficit now seems almost pre-ordained to grow at $1.3 trillion or so each and every year—around 2 1/2 times the concurrent increase in private sector GDP (that number again!) and unfunded to the tune of a dangerous, potentially intractable and thus highly inflationary 35-40% of expenditures.
Whether or not the Fed is successful in its misguided quest to de-emphasise the so-called price stability part of its mandate in favour of the wild goose chase of trying to reduce unemployment on a permanent basis by monetary means, the lack of continence it has encouraged among an intellectually-vacant political elite—as well as the dire budgetary consequences of any reversal in bond yields from their post-War nominal lows on a full GDP-scale debt mountain—argue against any easy reversal of their joint stance.
It might not go unnoticed that the simplistic, but nonetheless illustrative, measure of the ‘misery index’ — unemployment plus consumer price inflation — currently stands at a 19-year high (even under what many darkly mutter are today much less exacting standards than heretofore prevailed) and is, moreover, pushing resolutely onward into territory only visited in the post-WII era during the dreadful spell between 1973-83 when it seemed as if we had finally driven a stake through the heart of the bloodsucker of Bloomsbury.
This is not just a matter of passing interest, since rising prices amid chronic joblessness is a mix which often widens the split between input costs and output prices—a phenomenon which also tends to go hand in hand with higher levels of CPI itself. Such a combination is usually disastrous for equity multiples, which are themselves the main determinants of stock returns, so — even by his own rather dimmed lights — Chairman Bernanke is again on track to achieve exactly the opposite effect of the one at which he is aiming.
Anyone requiring a further explanation of how this arose should go and read Ron Paul’s cogent rehearsal of the ills that afflict the nation in his recent WSJ editorial, a well-justified Philippic in which he also adopts a view about just what it is that is forestalling the recovery which will be familiar to readers of these pages:-
What exactly the Fed will do is anyone’s guess, and it is no surprise that markets continue to founder as anticipation mounts. If the Fed would stop intervening and distorting the market, and would allow the functioning of a truly free market that deals with profit and loss, our economy could recover. The continued existence of an organization that can create trillions of dollars out of thin air to purchase financial assets and prop up a fundamentally insolvent banking system is a black mark on an economy that professes to be free.
Hear! Hear!
Commodity Corner
Around about this time last year, the market began to shake off its angst and buy anything and everything in sight in an increasingly indiscriminate move which would see commodities, stocks, junk—and just about anything else with the word ‘Risk’ attached—rise for the better part of seven months.
But last year’s rally, however ephemeral its impact either as a prop to asset prices or as a fillip to the real economy, was at least based on something tangible. The Fed was actively monetizing a sizeable fraction of the US budget deficit through its QE-II programme; Chinese real money supply growth—while undoubtedly slowing—was still swirling along in the high teens, in contrast to today’s sluggishly low single digits; the RBI was only a third of the way through its (unfinished?) tightening phase; likewise, the Banco do Brasil had seemingly paused, half way through its eventual schedule of higher rates; and the European debt crisis was still only a cloud on the horizon — and a cloud which lowered only over the periphery, at that.
In other words, however futile the attempt to print the world back to prosperity, something tangible was afoot and the newly-created monies were flooding into their most immediately accessible outlets in financial markets, en route to effecting their more malign consequence of raising the price of necessaries for the common man.
This time around, the rally was built more on hope and fear than on anything more concrete: hope that the Fed’s Operation Twist would actually mean something other than just the latest act of vandalism committed upon the price mechanism; hope that Europe would issue itself a large blank cheque and have it delivered in wheel barrows to finance ministries and banking headquarters all across the Zone; and the fear of being caught short of benchmark and mired in the slough of negative returns if the year somehow ended in a sustainable relief rally.
Two weeks of that may have been enough to goose the DAX by almost 20% and the S&P and Emerging Markets by close to 15%; it may have jolted base metals 10% and Brent Crude 17% higher; it may have reversed 140bps of the prior steep rise in junk credit spreads, but it does not look like it changed either the fundamental backdrop or the fact that new sources of central bank jungle juice are so far proving very hard to identify.
So, with a nod to the fact that everyone underwater is currently desperate to locate some last remaining, no-brain trade onto which to bandwagon, in order to dress up another year of lacklustre performance and to avoid one more career-endangering embarrassment of charging fees as a reward for losing clients’ money, we must start from the assumption that the rally has run its course, having achieved what all bear market rallies do — to magnify the pain while recharging the powder magazine — and that there is a risk that the current probe lower is met with a further, irresistible wave of panicky liquidation.
By Tim Lucas, on 21 September 11
I have heard it said many times that China’s economy is likely to be resilient as it is sitting on huge foreign exchange reserves. The argument goes that should the Chinese banking sector run into trouble, the government will simply bail it out through sales of its trillions of dollars of US treasuries, accumulated over the last couple of decades.
Nothing could be further from the truth.
In order to examine the ability of the government to utilise these foreign exchange reserves, it is worth examining the mechanism though which they were accumulated. It goes something like this:
Chinese exporters sell goods to the rest of the world – particularly to the US. In order to pay for this, the US consumers use dollars, many of them freshly minted by the US central bank.
Chinese exporters now have dollars which they exchange for Renminbi at the commercial banks. The commercial banks then exchange the dollars for freshly printed Renminbi at the Chinese central bank. These dollars are then warehoused at the central bank and not spent. The purpose of the Chinese government in doing this is to keep its currency weak against the dollar.
However, the point of this is that expansion of the domestic Renminbi money supply is dependent upon additional dollar flows. It was this constant increase in new dollars that for many years resulted in the domestic monetary inflation within China.
More recently however, the flow of dollars has not been nearly so strong. When adjusted for overseas debts, the accumulation of new dollars since the financial crisis has been fairly lacklustre. In order to maintain the rate of increase of money in China since the crisis, the government has, therefore, commanded its domestic banks to increase lending through the normal fractional reserve trickery we have seen globally, thus leading to the credit boom we have witnessed in the domestic economy in China.
The point of all this is that any reduction in foreign exchange reserves in China necessarily results in a reversal of the process above – i.e. a reduction in the outstanding number of Renminbi in the system; the dollar reserves are the reserve base of the Chinese central bank and all domestic money is pyramided on this monetary base. Given that the Chinese economy is precariously dependent on overvalued real estate, induced by a credit bubble, this policy option is – therefore – effectively closed for the Chinese government.
Conceivably the Chinese government could diversify out of US treasuries into another currency. There has been some talk of it buying European sovereign debt in order to support the European governments in their increasingly desperate attempts to preserve the Euro in its current format. They can’t – however – afford to lose these reserves on an ill-conceived gamble as this would undermine their own domestic money supply, so Eurocrats hoping for Chinese peripheral debt-purchases may be disappointed; China would need some hefty guarantees.
The most likely course for China remains –therefore- that its domestic bubble will run its course and end like all bubbles: with a crash.
By Lewis Lehrman, on 12 September 11
China is an important trading partner of America. But it may also be a mortal threat. And not for the conventional reasons usually cited in the press. Ironically, it is a threat because China is in fact a financial colony of the United States, a colony subsidized and sustained by the pegged, undervalued, yuan-dollar exchange rate. Neither the United States nor its economic colony seems to understand the long-term destructive consequences of the dollarization not only of the Chinese economy but also of the world monetary system. While the Chinese financial system has been corrupted primarily by tyranny, deceit, and reckless expansionism, it is also destabilized by the workings of the world dollar standard. Neither the United States nor China has come to grips with the perverse effects of the world dollar standard.
The social and economic pathology of 19th century colonialism is well studied, but the monetary pathology of its successor, the neo-colonial reserve currency system of the dollar, is less transparent. In order to remedy this pathological defect, the United States must rid itself of its enormous Chinese financial colony, whose exports are subsidized by the undervalued yuan in return for Chinese financing of the U.S. twin deficits. Both China and the United States must also free themselves from the increasing malignancy of the dollar reserve currency system, the primary cause of inflation in both China and the United States.
In the end, only monetary reform, including an end to the reserve currency system, can permanently separate the dollar host from its yuan colony. Without monetary reform, the perverse effects of the dollar reserve currency system will surely metastasize into one financial and political crisis after another – even on the scale of the 2007-2009 crisis.
It is, of course, a counter intuitive fact that China has been financially colonized by the United States. But why is this a fact? Simply because China has chained itself to the world dollar standard at a pegged undervalued exchange rate, choosing therefore to hold the exchange value of its trade surplus – that is, its official national savings – in U.S. dollar securities. It is true that the dollar-yuan strategy of America’s Chinese colony has helped to finance a generation of extraordinary Chinese growth. But China now holds more than 3 trillion dollars of official reserves and more than a trillion dollars in U.S. government securities. These Chinese dollar reserves directly finance the deficits of the American colonial center. This arrangement clearly resembles the imperial system of the late 19th century. The value of a British colony’s reserves were often held in the currency of the imperial center, then invested in the London money market. Thus, the colony’s reserves were entirely dependent on the stability of the currency of the colonial center. While China is America’s largest financial colony, most other developing countries are also bound to neo-colonial status within the reserve currency hegemony of the dollarized world trading system.
China’s dollarized monetary system reminds us of nothing so much as the historic colonial financial arrangements imposed by the later British Empire on India before World War I – India actually remaining a financial colony of England long after its independence in 1947. How did the sterling financial empire work? The imperial colony of India, beginning in the late 19th century, held its official Indian currency reserves (savings) in British pounds deposited in the English money market; independent developed nations at that time, like France and Germany, held their reserves in gold. That is, France, Germany, and the United States settled their international payment imbalances in gold – a non-national, common, monetary standard – holding their official reserves, too, in gold. But the London-based reserves of colonial India were held not primarily in gold, but in British currency, helping to finance not only the imperial economic system, but also the imperial banking system, imperial debts, imperial wars, and British welfare programs. Eventually, as we know, both the debt-burdened British Empire and its official reserve currency system collapsed.
For more than a generation now, a similar process has been at work in China. China is America’s chief colonial appendage. The Chinese work hard and produce goods. Subsidized by an undervalued yuan, they export much of their surplus production to America. But, like the Indians who were paid in sterling, the exports of Chinese colonials are substantially paid in dollars, not yuan – because bilateral and world trade, and the world commodities market, have been dollarized. And thus it may be said that the world financial system is today an unstable neocolonial appendage of the unstable dollar.
China, like its predecessor the British colony of India, has chosen to hold a significant fraction of what it is paid in the form of official dollar reserves (or savings). These dollars are promptly redeposited in the U.S. dollar market, where they are used to finance U.S. deficits. Every Thursday night, the Federal Reserve publishes its balance sheet, and there we now read that more than $2.5 trillion of U.S. government securities are held in custody for foreign monetary authorities, 40 percent of which is held for the account of America’s chief financial colony, Communist China. It is clear that without financial colonies to finance and sustain the immense U.S. balance of payments and budget deficits, the U.S. paper dollar standard and the growth of U.S. government spending would be unsustainable.
It is often overlooked that these enormous official dollar reserves held by China are a massive mortgage on the work and income of present and future American private citizens. This Chinese mortgage on the American economy has grown rapidly since the suspension of dollar convertibility to gold in 1971. China – poor and undeveloped in 1971 – was at that time very jealous of its sovereign independence, sufficiently so to reject its alliance with the Soviet Union – even earlier to attack U.S. armies on the Chinese border during the Korean War.
In an ironic twist of fate, China surrendered its former independence and, as a U.S. financial colony, joined the dollar-dominated world financial system. China’s monetary policy is anything but independent. It is determined primarily by the Federal Reserve Board in America, the pegged yuan-dollar exchange rate serving as the transmission mechanism of Fed-created excess dollars pouring into the Chinese economic system. Perennial U.S. balance of payments deficits send the dollar flood not only into China but also into all emerging countries. The Chinese central bank buys up these excess dollars by issuing new yuan, thereby holding up the overvalued dollar, and holding down the undervalued yuan. Much of these Chinese official dollar purchases are then invested in U.S. government debt securities. So even though America exports excess dollars to China, China sends them back to finance the U.S. budget deficit – much like marionettes walking off one side of the stage, merely to reappear unchanged on the other side.
This is the little-understood arbitrage mechanism of the pegged exchange rate system by which Fed-created excess dollars are bought and held as reserves by the Chinese central bank, in exchange for which newly created yuan are issued, thereby supercharging inflation in China. The Chinese dollar reserves, which are reinvested in the United States, help to ignite inflation in the United States. It is clear that the workings of the official dollar reserve currency system cause spending power to be multiplied, or at least doubled, in both countries. But these central bank issues of new money are unassociated with the production of new goods and services during the same market period. Thus total spending exceeds the total value of goods and services at prevailing prices. When total demand exceeds total supply, the price level must rise.
But just as the subservient, colonial Indians were constrained not to sell their sterling reserves too quickly, so the Chinese are constrained-by politics, diplomacy, and self-interest not to dump their depreciating American dollars. The Indians had to consult their imperial bankers, even though the English were debtors to their Indian colony, because the Indians did not wish to anger the colonial center, nor to precipitate a sterling crisis. From time immemorial, creditors with too large a stake in an over-sized debtor often beg leave of their debtor to get their money back.
China is frustrated by circumstances similar to those of a colony of imperial Britain. Hostility has arisen in the debtor – the United States. Fear of setting off a dollar slide haunts the hostile creditor, China. The difficulty of finding a suitable portfolio of alternatives for a trillion dollars in U.S. government debt annoys the outspoken Chinese financial colony, as it calls for a new world monetary system. But there seems to be no genuine alternative to the very liquid dollar market. De facto illiquidity of official Chinese dollar reserves is enforced by political sensitivities, not by market salability. The debtor, as the saying goes, is “too big to fail.” Thus arises an unstable stalemate, a yuan-dollar pegged exchange rate regime constantly on the edge of a crisis.
The “exorbitant privilege” of the dollar is matched by the insupportable burden of America’s overvalued reserve currency role, which has tended to deindustrialize the colonizer, gradually increasing social inequality by reducing the standard of living of lower- and middle-income American families. The reserve currency country then feels compelled, as the Fed does today, to depreciate the dollar in the vain hope of eliminating the trade deficit and the balance of payments deficit – by becoming more competitive abroad as it becomes poorer at home.
The perversity of the official reserve currency system is endless as China now endures high inflation engendered by its colonial status in the world dollar system.
Which way out?
The floating, pegged exchange rate system based on the dollar has been slowly decaying since the end of World War II. But the dollar-based reserve currency system, because of the unmatched scale and liquidity of the dollar markets, could last another generation. When it will collapse cannot be predicted. That it will collapse, without systemic reform, I think inevitable. Few predicted the timing of the collapse of the pegged dollar system of Bretton Woods. But it did collapse in August of 1971, followed by America’s worst decade since the Great Depression.
Ultimately America, the leader of the unstable world financial system, must choose between two options.
-
The United States can wait for the eventual demise of the world dollar standard under chaotic
conditions, similar to the final sterling collapse and the subsequent collapse of Bretton Woods in 1971. This option is analogous to the intrepid daredevil who leaps from his 10th floor window, and takes heart that he is still unhurt two floors from the street level.
-
Or, America could take the lead in reforming the official reserve currency system based on the dollar. Such a monetary reform program would entail a careful windup, by agreement, of the world dollar standard. At the same time, America would reestablish by statute a dollar convertible to gold, i.e., a dollar defined in law as a weight unit of gold. Gold would replace the dollar as the world’s reserve currency.
The reform would, first and foremost, establish a tested, non-national, neutral monetary standard as the basis of a stable dollar-one which reasonable sovereign trading partners could accept. Gold would become the international settlements currency and thus would replace the dollar as the basis of world trade and finance. Inasmuch as monetary history shows that no unstable national currency can permanently serve as the crucial world reserve currency, it follows that neither can an unstable basket of national currencies, nor can a fiction such as the SDR – the reserve asset created by the International Monetary Fund to supplement member countries’ reserves.
But we are left with the question: what does the evidence of American history suggest as the basis for a stable dollar?
The stability of the U.S. dollar has varied widely in its history. This variation is explained by two factors: the monetary standard chosen for the dollar, and whether other countries have simultaneously used cash and securities payable in dollars as their own reserves, even as their monetary standard itself (i.e., official reserve currencies in place of gold).
The United States has alternated between two kinds of standard money: inconvertible paper money and some precious metal (first silver, then gold). The dollar was an inconvertible paper money during and after the Revolutionary War (1776-92), the War of 1812 (1812-17), the Civil War and Reconstruction (1862-79), and again from 1971 to present. The dollar was effectively defined as a weight of silver (and gold) in 1792-1812 and 1817-34, and as a weight of gold in 1834-61 and 1879-1971. The minted gold eagle, set equal to 10 dollars, and subsidiaries thereof, was provided for in the Coinage Act of 1792. The dollar was not used by foreign monetary authorities as an official monetary reserve asset before 1913, but the dollar has been an official “reserve currency” for many countries since World War I (along with the pound sterling). The dollar has been the primary official reserve currency for most countries since 1944.
Applying two criteria divides the monetary history of the United States into distinct phases. We can compare the stability of these monetary regimes by examining the variation in the Consumer Price Index (as reconstructed back to 1800) by two simple measures: long-term CPI stability (measured by the annual average change from beginning to end of the period of each monetary standard) and short-term CPI volatility (measured by the standard deviation of annual CPI changes during the period).
Weighting these criteria equally, the classical gold standard from 1879-1914 was the most stable of all U.S. monetary regimes.
After the failures of several generations of unhinged paper currencies, pegged and floating exchange rates, America should embrace a stable monetary system tested in the laboratory of human history – the cornerstone of which the elites have rejected for a century. It is now time to restore that cornerstone – the true gold standard, shorn of the economic pathology of official reserve currencies. Now is the time to restore the American monetary standard authorized by the Founders in the Constitution – Article I, Sections 8 and 10. Now is the historical moment for America to take the lead and again give the world a real money, the Founders’ gold dollar of the Coinage Act of 1792. What the Founders learned from the paper money inflation of the Revolution, the recent past has taught us again. America and the world need a monetary standard which, unlike the paper-credit dollar, cannot be created at zero marginal cost with which to dispossess the prudent and to subsidize the U.S. government and insolvent financial institutions at near zero interest rates.
For America to establish the gold standard would provide the least imperfect monetary solution to the problems of a century of financial disorder – engendered over and over by central bank-manipulated paper money, official reserve currencies, and floating pegged exchange rates. Only a stable dollar, a dollar defined by statute as a weight unit of gold, can pin down the long-term price level, restoring the incentive to save and ruling out extreme inflation and deflation. Such a dollar convertible to gold would reopen the road to confidence in the long-term value of the U.S. monetary standard. This is the durable road to economic growth and prosperity-financed by increased long-term savings, increased long-term investment, and rising demand for labor at rising real wages.
This article was previously published in The American Spectator and at Pravda.ru. We are grateful to Ralph Benko for bringing it to our attention.
By Toby Baxendale, on 29 June 11
Sean Corrigan’s latest appearance on CNBC is well worth watching (3m 42s).
Mon 27 Jun 11 | 02:00 AM ET
The Chinese economy reflects the ‘Vampire Economy’ of Germany in the 1930s where the state controlled prices at the expense of profit, Sean Corrigan, chief investment strategist at Diapason Commodities Management told CNBC Monday. He added Chinese inflation figures were “not realistic of the stress in the system.”
By Dr Tim Evans, on 27 June 11
A couple of weeks ago in the offices of the Adam Smith Institute, I addressed more than twenty of China’s most senior economic thinkers while they visited London. All were members of China’s Development Research Centre (DRC) – the leading think tank of Communist Party’s Central Committee and the State Council.
At their request, I touched on the history of the UK’s free market think tanks, the importance of maintaining independence and how, in the Anglo-sphere, such organisations are often funded by a diverse array of non-governmental sources including individuals, foundations and enterprises.
I also talked about money, banking, accountancy rules, the sovereign debt crisis and I even briefly managed to touch on the issue of gold. Everyone smiled when we mused over the fact that the Chinese state represents 32 percent of GDP while the UK government is heading towards 52 percent.
However, the real fun started when we moved to the questions and answers section. Very quickly, a hand went up in the front row and through the translator a gentleman on my right asked “have you ever heard of the Austrian School of Economics?” I smiled, paused, said “yes”, explained why, and we all moved forward.
Later, the leader of the delegation said that while Adam Smith had been translated in to high Chinese at the beginning of the twentieth century, the Communist Party had had it more accessibly translated thirty years ago – in the early 1980s.
Now, reflecting on all of this after the event, I was reminded of something a friend at Liberty Fund had said to me concerning the launch of The Online Library of Liberty in the middle of the last decade. Within two days of the library going live its South East Asian server out of Australia crashed. Under investigation it turned that it had been due to the number of students in China trying to download J.S. Mill’s On Liberty.
I have no idea how many people in China are reading the classical liberal ideas of Adam Smith and J.S. Mill or are in any way familiar with the greats of the Austrian School of Economics. But this is a question to which I wish I had an answer.
By Sean Corrigan, on 11 April 11
Imagine a country where the average household routinely spends half its $100 income on buying in 4,000 calories a day of flour and half on all the other necessities, as well as the little luxuries, of life.
Next, picture the response if the subjectively perceived degree of scarcity of flour suddenly rises, pushing its price up 20% as it does. To keep matters as simple as possible, let us not delve too deeply into the whys and wherefores of this impetus, but simply let us insist it is not because of any actual shortage of physical supply on the cash market.
Assuming that demand for this staple of its members’ diet is close to an irreducible minimum, and that, in its anxiety to maintain its basic nutritional needs, the family will henceforth have to spend $60 on flour instead of $50 and so will be left with a mere $40 to devote to its purchases of everything else in place of the previous $50.
Supposing, too, that money in this benighted land is no longer an emergent construct of mutual intercourse and free exchange – and therefore, in some sense, ‘hard’ – but is rather issued without restraint, at the whim of a central collective of Platonic Guardians.
Let us further insist that Hoi Phylakes see it as their calling to ensure that the averaged prices of all things other than flour can never decline and, subject to some very woolly and ill-defined limits on how much politically insupportable harm they cause in the attempt, that no-one shall lack employment for reasons which a loose-thinker might attribute to a simple lack of money, no matter how sub-marginal or even blatantly unremunerative his labours might be.
Now, given that the jump in the price of flour has – at least as a first-round effect – led to only $4 being offered for a basket of goods which used to attract an offer of $5, the combined effect (differentiated among them as it will be in practice) is that they will fall in price by something of the order of 20%. Barring some miracle of instantaneous cost cutting, the total wage bill at the firms in that line of business will need to be reduced proportionately, meaning steep wage cuts or heavy job losses – each of them anathema to the Keynesian creed of orthodox economics.
Enter the central bank, stage right. If the lack of a post-flour disposable $10 (per household) has seen ‘deflation’ of such a hideous magnitude set in among the arbitrarily flour-excluding array of goods which it monitors, the instant addition of another $10 pro rata to the money supply should, it feels, set matters straight at once.
Alas for the conceit of the planner, for, as our original premise made clear, consumer preferences have decisively shifted in favour of buying flour not other goods, to settle at a new ratio of 60/40. Thus, the new exchangeable total of $110 (assuming the extra money to have been placed into the hands of the same family and not diverted off into some other passing fad or siphoned craftily into the pockets of the politically well-connected) is likely to have $66 of it used for flour and only $44 laid out on the rest, so ‘core deflation’ (in reality nothing of the sort, of course) will only have been ameliorated to -12% and not banished entirely, as was the naïve intention.
Chasing on through this battle of wills between the state and the individual – and still ignoring second order effects – an equilibrium might only be looked for when the supply of money has been artificially swollen by no less than a quarter – to $125 per household – whereat each family can spend three-fifths ($75) of this, as they desire to do, on flour and two-fifths – or the original $50 – on everything else and so finally eliminate ‘core consumer price deflation’ if only at the cost of magnifying the original, steep 20% rise in the price of flour to a vertiginous, final 50%.
Of course, that would not be an end of it, for none of this has masked a major alteration in the terms of trade between people in their (often simultaneous) roles as flour producers and consumers, nor between them in their non-flour equivalents. Ultimately, one set has benefited from the shift and one has lost out.
Granted, to the extent that flour producers and flour consumers are not entirely one and the same body of people and, hence, may express a varying menu of preferences, the former may seek to enjoy their relatively higher incomes by buying things other than flour for themselves and so partially mitigate the real effects on others.
Moreover, the change in relative pricing (something which would have taken its natural course even if there had there been no Ivory Tower full of academic meddlers and shallow special-pleaders) will have sent signals to people everywhere that they need to further adjust to a change of circumstances largely of their own creation. Thus, they might more closely review their use of the newly-expensive flour, making sure they maximise its utility and minimise any inefficiencies or identifiable excesses in its use.
They might devote care and attention to improving grain yields, bringing more land into cultivation, automating the milling process, easing the logistics of delivery to the point of sale, and even to developing alternative sources of sustenance.
Meanwhile, the producers of non-flour goods – who nonetheless also require their daily bread if they are to have the energy to man their own offices and factories – will seek to change the ratio between the necessary flour input (and, indeed, of any other inputs) and both the physical output – and, more importantly, the value entrained therein – of what they sell in order to earn that same bread, whether for personal consumption or productive uptake.
All in all, the initial shift in relative prices – however painful to those caught unawares by it and however threatening to those improvident enough to be conducting their business without an adequate reserve against this or any similarly unforeseen vicissitude – will incentivise savers to direct funds to those entrepreneurs whose own success will depend upon serving the currently expressed preferences of their customers better than their competitors and who, along the way, will slowly but surely lessen any constraints imposed by the original re-ordering of wants.
It cannot be too strongly emphasised that this would have happened whether or not the central bank had embarked upon its Canute-like programme of futile – or, rather, actively counter-productive – monetary infusions. These will only have multiplied the confusions over both the nature and the degree of the shift which was taking place and so delayed the implementation of the necessary schedule of adaptations, something which could have been most swiftly and least wastefully realised on an entirely unhampered market.
However, given the all-but inevitable fact of the Bank’s visitations, let us pause a moment to reckon the true achievements of our pecuniary Politburo in its vainglorious attempt to frustrate the workings of economic law.
Above all, it has thrown obstacles in the paths of both the consumers and the entrepreneurs who seek to direct the productive methods by which those same consumers’ efforts aim to satisfy their own needs – whether through offering their current labour or the savings which represent the unharvested fruits of their earlier labour.
It has effected an inequitable transfer of real wealth from creditors to debtors as a result of the sharp reduction in the value of the money in which the contracts between the two are written. It has probably done something similar to relations between counterparts at home and abroad through the effect on the currency exchange rate – something in which it will take a truly perverse degree of pride. In each case it will have made people more distrustful of acting according to that very division of labour, both across space and through time, which is what so enriches us all.
It has protracted and exacerbated the first, spontaneous rise in the price of flour with no better aim than to give everyone else the illusion that their stabilized nominal receipts have in some way compensated for their sharply fallen real ones – a cruel enough illusion if it succeeds: a fertile seed of social discontent if it does not.
It is also likely to have involved the heavy-handed intervention of the other organs of state power. These will probably stir up animosity towards the flour producers (especially if they live abroad) even to the point of penalising them retrospectively (an affront to natural justice) and so stripping them of both the motivation and the means to increase supply.
In their inept, après moi le déluge populism, they may well stoop to subsidising the consumption of that very flour which the public interest insists should be the subject of a much closer economy of use. They will probably invoke an aggressive policy of autarky, banning exports and paying tax- or inflation-dollars to homegrown Ersatz boondogglers while spreading the discord across the nations’ borders to the detriment of all concerned.
Never wasting a ‘good crisis’, all this will inevitably enhance the office-holders’ power of patronage and increase the rents paid to their cronies at the expense of the well-being of all other members of the commonwealth at large.
Finally, the central bank will have helped fuel an increasingly feverish round of financial market speculation – not just in flour but, as the all-too fungible money pours into the system and the itch to play with it becomes undeniable, in all manner of other things as well. ‘Speculators’ – the most active of them ironically housed within or financed by the central authority’s very own, cherished recipients of corporatist largesse and protection – will then provide a convenient scapegoat upon whom to deflect all criticism about the economic pain being suffered as the result of its own criminally misguided actions.
I hardly need to say that to substitute ‘oil’ for ‘flour’ or to specify one central bank in particular is to turn our little Gedanken economy into a passably close representative of the situation in which we all find ourselves today, one from which there seem to be all too few pathways not strewn with thorns, their paving of good intentions long-since broken up into a wearisome thoroughfare of jagged rocks and ankle-twisting potholes.
In fact, in command of the Federal Reserve is a coterie which is at once seeking to rationalise away its implication in rising commodity prices—the infamous argument about the cheaper, hedonised iPad2 being enough to mitigate the strain on household budgets imposed by the soaring price of necessities—and simultaneously relying upon a future deceleration in their rise to make subsequent year-on-year changes less contentious, simply by dint of the arithmetical ’basis effect.’
As well as being a decidedly obvious attempt at having things both ways, what we really have here is a hidden policy of rehashed, New Deal, price level targeting—i.e., price rises are not only not to be fought, but actively encouraged, so long as these erode both real debt levels and real wages, although it is also to be hoped that they do not increase for too long at the current rapid rate, lest that conditions an economic response which is only likely to see them spiral upward in a disastrously quickening fashion as echoes of Mises’ famous ‘crack-up boom’ begin to be heard.
Against this, the market has become somewhat fixated on what happens at the end of June when the current monetization of the misconduct of a derelict fiscal authority is due to end—an obsession which has some justification given that it has arguably been the single most important factor in a 32-week run which has led to the fastest, like-period gains in commodity prices since the first oil shock and to a rise in the S&P which, before being dampened by events in the Middle East and the Miyagi prefecture, had touched a rapidity only lately exceeded during the initial rebound from the GFC, the Tech Bubble, and the run-up to the Crash of ‘87.
Even if the winds are blowing against any immediate extension of this insanity, there seems little doubt that the Bernanke Fed is concreted into a position of chronic over-laxity and that if both asset prices and the macroeconomic aggregates subsequently start to suffer a bout of cold turkey, it will not be too long before the political calculus once again begins to coincide with the prejudicial leaning of the Chairman and his acolytes on the FOMC and some other, equally ill-advised measures are taken in response.
Two further market reactions may well prove conducive to such an early resumption of the game.
Firstly, much hinges on the fate of Treasury yields which will only have the support from any emergent ‘Risk Off’ move to help them and not the rather more tangible backstop of a near-100% central bank bid for net new debt. By seemingly ‘overtightening’ asset markets—and by dint of its possible repercussions for stock prices — this would see a widespread chorus of complaints—emanating from Wall St. as well as the Beltway—in favour of a prompt resumption of the policy of the printing press.
Secondly, any liquidation-led drop in key commodity prices—most notably oil – will strengthen the Fed’s hand in arguing, however speciously, that it was right all along not to compound the economically disruptive effects of a rapid rise in the stuff with a succession of higher interest rates, as was typically its response in the past.
Beyond the influence exerted by the Fed (and the policy paralysis evident at the BOE), we have seen the ECB make good on its threat to act just a little more responsibly when it raised its rates by 25bps and then backing this up with some reasonably forthright rhetoric which implies that the market is right to fear that there might be more in store where that came from.
In truth, we should not be as harsh about the bankers in Frankfurt as we are about their transatlantic peers, since the ECB has been reasonably successful in ring-fencing its emergency, quasi-fiscal role as financier of bust PIGS from its more typical function of providing liquidity to the system at large. So much so, in fact, that real Eurozone M1 is barely growing at all, having undergone its sharpest deceleration in at least thirty years—a grand aggregate phenomenon which presumably masks sharply divergent behaviour in a Germany where industrial production is rising at a trend 10% a year pace to within a whisker of its pre-Crash highs and the blighted, over-built periphery where the weeds are metaphorically springing up in the half-completed streets.
As for China, despite a swathe of surprisingly forthright local commentary underlining the inflationary horror which was unleashed by last year’s vast stimulus efforts, its central bank’s latest incremental tightening has been greeted with a yawn by a market both increasingly conditioned to such measures and wilfully optimistic that each such move simply hastens the great day when the series will end and we are off to the races again, trading everything frantically up on the wings of a newly invigorated Dragon.
That leaves as perhaps the most salient question to confront us as that relating to the side-effects of the BOJ’s programme of emergency liquidity injections, loan-support programmes, forex intervention, and—potentially—fiscal backstopping for another creakingly over-burdened state.
Already the Bank’s balance sheet has climbed to post-Lehman heights and the count of current account (reserve) balances has soared beyond all previous comparison, breaking the yen out against nearly every currency pairing of significance and taking risk reversals and basis swaps and other such positioning indicators with them.
The burning issue here, then, is this: in its misplaced anxiety to assist its people by showering them with money amid the rubble of their lives and homes, will the BOJ do enough to re-instate the yen as carry currency of choice and so negate any contractionary effects (however ephemeral) of the coming end of QE-II in the US?
That, my friends, is the $64 trillion question!
By Tim Lucas, on 23 March 11
Loose US monetary policy has had its echoes all around the world. The US dollar, once thought to be “as good as gold”, has now been shown be nothing of the kind. Gold bugs the world over have been proven right. Countries scattered all over the world have either dollarised, or run very tight pegs. In either case, this has meant largely adopting US monetary policy in countries as far flung as humble Ecuador (dollarised in 2002 following its own runaway inflationary disaster, which resulted in the emigration of 10% of the population) to the collection of Asian nations, China, Hong Kong, Malaysia, Taiwan, Indonesia, all of whom adopt some sort of peg to the US dollar. Without exception, each of these countries has experienced extreme property appreciation these last two years.
This documentary explores the Chinese experience.
The mechanism through which expansionary policies are communicated through China appear to follow the following pattern:
- Central government requires GDP growth/employment creation and so instructs the state-owned banks to lend.
- State-owned banks lend principally to state-owned companies as these are good credit-risks, backed – as they are – by the state.
- State-owned companies buy land from local governments for property development in accordance with a master plan for development of a new business district.
- Local governments spend the proceeds on who-knows-what…here the trail goes cold. However, land sales actually account for the vast majority of local governments’ income so one can be sure that they put plenty of pressure back on the central government to keep the cash coming! Once the local government has it, this cash leaks out into the real economy somehow. Some of it presumably gets recycled into new deposits on property.
- Individuals buy units using mortgages from private and state-owned banks, often using equity released from the appreciation of property bought in previous transactions. Ultra-low interest rates, fixed by the central bank, help them keep up with their repayments.
In short, this process is little different in essence from the credit-fuel property booms that have occurred the world over and it will have at its heart cronyism, corruption and waste.
The stories of the booms and busts of each country carry a different twist as the setup of institutions in each country is different, with the common flavour being that of credit growth aided by monetary expansion.
To the requisite ingredients of loose money and credit growth, China has added the explosive ingredient of it being a command economy, which has served to amplify the misallocation of capital. The results are spectacular. The most populous nation on earth does most things on an epic scale, and property boom and bust is seemingly no exception. Enjoy.
Related articles
By Sean Corrigan, on 2 March 11
Even though the Chinese authorities made no bones about the fact that they had conveniently ‘rebased’ their latest CPI numbers in order to mitigate the rather inconvenient influence thereupon of surging food prices, so eager was the market to hew to its chosen course of Onward and Upward, that this naked manipulation was gratefully taken at full face value, all around the speculative globe.
Perhaps more germane to the preservation of the Herd’s blithe psychology, however, was the additional information that Chinese money supply seems to have decelerated alarmingly to reach its slowest real (and nominal) pace since the great, post LEH‐AIG adrenaline shot was injected directly into the heart of the economy in early 2009.
Moreover, there are numerous reports in the press that the successive increases in bank reserve ratio requirements are starting to bite and that pressure is also being felt in maintaining the prudentially‐mandated loan‐deposit ratios in a system where banks are precluded from competing for deposits by adjusting interest rates and where their customers are becoming tired of seeing the real value of their savings continually eroded.
If this is indeed the case—and, as ever with China, it is foolish to be too categorical about what does or does not make it into the English version of its press—this could truly mark the beginning of the end of the reflationary asset cycle we have all been so happily riding, for much of these past two years.
Certainly, China, is not the whole world, but it has unchallengeably become what is perhaps the nexus of current economic evolution, as well as comprising the most important marginal consumer of many key inputs, whether we consider raw materials, capital goods, or components.
Take two‐way trade flows as an instance. From a base of around 15% of those passing across US borders in the 1990s, China’s ports now deal within excess of 70% of the value handled in the world’s biggest economy and the gap is closing so rapidly that—were the present trends to remain in place for just another 3‐4 years— China would take over the undisputed, global number one spot. Just in case one is tempted to dismiss this as more a tale of secular American decline than of Chinese resurgence, note that, in the same period and in regard to this same measure, China has moved from 50% of Japan to more than 200% and from ~30% of Germany to 140%.
Another little factoid which should give one pause is that, over the past six years, China’s cumulative $920 billion trade surplus with the consumer of first resort—the US— matches, almost dollar for dollar, China’s combined trade deficit with Japan, South Korea, and Taiwan combined, a correspondence reinforced by that fact that the relevant totals for each individual year lie in a range of parity +/‐15%.
For another indication of the key role being played by China and those within its economic ambit, take the case of Germany. Between 2000 and 2010, this, the world’s other great export powerhouse, did almost no new business with the US, its growth being predicated upon sales to (and purchases from) the rest of Europe (whether inside or outside the single currency area) with between a fifth (of incremental exports) and a quarter (imports) also being accounted for by Asia.
To show just how crucial this re‐orientation has been for the German rebound of the past two years, look also at the following plot showing the progression of business revenues through Boom and Bust, and take this in cognisance of VDMA comments about its members’ unprecedented present concentration of orders in Asia, in general, and China, in particular.
Thus, if China’s tightening does continue in earnest—and if it has the same effect as those already being felt in, say, India and Brazil ‐ then we can expect some pretty significant ramifications to ensue.
|
|
