Tuesday, November 11, 2008

China stimulus doubters don't understand soft currency economics

On Barry Ritholtz's blog a story appeared that claimed, "China's stimulus is no such thing."

It states:

"Compare China — a country with a centrally planned economy, carefully managed by a communist regime — with the United States. The US has a $14 trillion economy, of which about $3 trillion is government spending (military, entitlements, discretionary). Any new stimulus plan — be it tax rebates, direct spending on public works programs, or aid to the auto industry — is essentially new spending that didn’t previously exist.

When $3 trillion becomes $3.17 trillion, it is significant. It is as if the US is adding more pieces to the economic chess board.

China, on the other hand, is merely moving resources from one region to another. They are not creating more economic activity, putting cash in the hands of consumers, or even increasing their infrastructure plans."

What the author misses is that the the Chinese Government can spend all it wants of its own currency and the People's Bank of China can credit bank accounts just like the Fed can in the U.S. The stimulus is as valid there as it is here. The fact that China has a centrally planned economy is irrelevant.

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