Category: Pettis - Economic Presence

Pettis once again takes The Economist to the woodshed for sloppy thinking

10/9/2012

So if anyone wants to continue to be very bullish about Chinese growth prospects over the next decade, it seems to me that he must address and answer these three questions:

How much debt is there whose real cost exceeds the economic value created by the debt, which sector of the economy will pay for the excess, and what is the mechanism that will ensure the necessary wealth transfer?

What projects can we identify that will allow hundreds of billions of dollars, or even trillions of dollars, of investment whose wealth creation in the short and medium term will exceed the real cost of the debt, and what is the mechanism for ensuring that these investments will get made?

What mechanism can be implemented to increase the growth rate of household consumption?

I had similar comments in May to The Economist's China issue.
"Wrong on sooo many levels. Yeah, when you "invest" in millions of units of housing that are empty then this is both a misallocation of capital and an overinvestment of capital. You have lit money on fire. This money is gone forever. Also, "The Economist" provides no hope or insight as to why a flawed investment process (driven by corrupt SOEs) will do better the next time around."

New Research Supports the Idea that Foreign Aid Helps Economic Growth

9/25/2012

Vox presents research that goes against mainstream economic thinking. Aid actually helps economic growth. Chalk one up for Bono and Jeffrey Sachs. I am particularly annoyed with Dambisa Moyo, anti-aid economist, who I also disagree with on the issue of commodities.

The Serletis - Barro text that I am teaching (intermediate macro) takes the perspective that trade is ineffective at raising growth -which is mainstream thinking on the topic. Barro even mentions his face to face conversations with Bono re:Debt Jubilee 2000 and his other initiatives. He views Bono as sincere but misguided.

Bono was calling for help to be accompanied my meaningful reforms which it strikes me is the standard IMF bailout rationale and the rationale used to support transfers to the periphery in the Eurozone.

I would almost bet that most economists in favour of the latter would not be in favour of aid to Africa.

Its an interesting world.

Pettis On Chinese Financial Repression

7/8/2012

Pettis:
Recently the Economist had an article arguing that China is not overinvesting, it is, they claim, malinvesting. I am not sure that I fully understand the distinction, but I do not think it is meaningful in the context of this debate.
That's what I said (I was not as tactful).

More:
So China has probably hit both constraints – capital is wasted, perhaps on an unprecedented scale, and the world is finding it increasingly difficult to absorb excess Chinese capacity. For all its past success China now needs urgently to abandon the development model because debt is rising furiously and at an unsustainable pace, and once China reaches its debt capacity limits, perhaps in four or five years, growth will come crashing down.

Similar comments in Hugh Hendry's April Eclectica letter.

Here is what I think the Chinese economy will look like over the coming years.

Pettis on BNN -bad for nonfood commodities

5/14/2012

He explains why China must slow significantly and why this will be bad for commodiities.

Pettis is back up

2/22/2012

With a new host. He lost most of his last 6 months of posts. Here is a vintage post on the US/China Trade deficit and the Fed choosing to allow imbalances to persist.

"Now if the initial cause was the PBoC capital exports, of course the Fed could possibly have foiled the capital impact of the PBoC intervention by raising interest rates and forcing up unemployment in the US.

This is the point that Martin Wolf has often made, and if the Fed had done so it might have caused private businesses to cut back on their investment more quickly than the resulting decline in savings, and the US could have effectively blocked capital
imports. The rising unemployment would have reduced US consumption and US imports, which would have reduced the US current account deficit. Remember, these are just the opposite sides of the same coin and one automatically implies the other. If the excess of investment over savings declines, so does the current account surplus.

For whatever reason, right or wrong, the Fed didn’t do this. The result was that the US had to run a capital account surplus. In the US, however, there are two ways the capital account surplus must resolve itself. Since the capital account surplus is equal to the excess of investment over savings, if the capital account surplus rises, broadly speaking, either savings must decline, or investment must rise (or some appropriate combination of both in which the excess of investment over savings rises)."

China Sceptic Professor's Website is Suspended

2/17/2012

One of the bloggers I have cited frequently as a sceptic to China's Policies, Michael Pettis, has had his site "suspended". Another blogger reports the following:

"I am saddened to report that Michael Pettis' site China Financial Markets has been blocked. The link redirects to a site with a one line message "This Account Has Been Suspended". When I have more details, I will post them.

Note: I just heard back from Pettis who is unsure of what happened. Hopefully this will be cleared up soon. "
Pettis lives and teaches in China.

Is this a case of "The Empire Strikes Back"? Regardless,I think we will soon find that the Emperor has no clothes.

Will China Devalue and spark a trade war?

1/23/2012

China's trade surplus is shrinking faster than expected. I told one of my graduate students last year when China moved to allow flexibility of its currency it was more likely to allow for devaluation not appreciation.(Shout out to Benny!)

Pettis raises the issue in a recent post.

"The slowdown in growth is worrying an awful lot of people in Beijing and with all this concern, of course there is a lot of attention on trade policy. Will the RMB appreciate or depreciate in 2012? Within China many are going to argue that the rapid decline in the trade surplus, coupled with unmistakable evidence of flight capital, means that the PBoC should devalue the RMB. Others within China will argue that debt levels and domestic imbalances are so worrying that the RMB should continue appreciating in order to speed up the pace of rebalancing.

If this were the whole extent of debate, it would be pretty easy to guess that the former side would win, but of course there is also international pressure. Foreigners are going to argue that China’s maintaining a trade surplus will simply subtract from foreign growth, and given higher unemployment and lower growth in the US, Europe, and much of the developing world, China has no natural right to insist on a trade surplus at their expense.

With the trade environment getting worse all the time, I suspect that international pressure is ultimately going to decide the issue. If China depreciates it will almost certainly set off furious retaliation – and remember, surplus countries always lose trade wars. Deficit countries often win, at least in the near term."

The Bottom line for Europe Part two

1/23/2012

In early December, I wrote about that the bottom line for Europe is they need a plan to reverse trade flows and generate employment. Here is a post by Pettis which echoes my words.

"Europe’s underlying problem is not budget deficits or even unsustainable debt. These are mainly symptoms. The real problem with Europe is the huge divergence in costs between the core and the periphery – in the past decade costs between Germany and some of the peripheral countries have diverged by anywhere from 20% to 40%. This divergence has made the latter uncompetitive and has resulted in the massive trade imbalances within Europe."

It is going to be a tough decade for the global economy and the BRICS will not save us.

8/29/2011

Unfortunately, I agree with much of the sentiments of Michael Pettis and have been teaching them in my International Macro classes (in the case of the Euro) for the past decade. For various reasons, I continue to prefer Brazil out of the BRICS and believe things will be substantively better for them than for the others. Other than that, my views pretty much line up with Pettis.

Those wanting just a summary click here.
Those wanting more in Pettis own words click here.

As I pointed out in my last blog, there are millions of jobs that have been lost in manufacturing since China joined the WTO. Absent intervention, these jobs are gone forever, and with the loss of millions of construction jobs, unemployment for the low skilled will become chronic.

I have suggested that that this will lead to a level of social unrest not seen in Amercia since the 60s. Pettis believes that both the US and UK will become trade protectionist. I see this as the easiest and most likely way that policy makers will deal with problems of social inequality. Fundamental reform of education is much tougher, especially in a budget constrained enviroment.