Basic macroeconomic theory says that a negative shock to GDP, caused for example by falling exports, can be completely offset by a monetary and fiscal stimulus. China is a good example of that idea in action. What about all the naysayers who predicted financial disaster if this was done? Well there was a mini-crisis in China half a dozen years later, but it is hard to connect it back to stimulus spending and it had little impact on Chinese growth. What about the huge burden on future generations that such stimulus spending would create? Thanks to that programme, China now has a high speed rail network and is a global leader in railway construction.Mainly Macro
Now of course people will say that China is not like an advanced democracy, and it was not part of the global banking network that caused the GFC. But the US and UK stimulus programmes could and should have been larger. Those close to the action tell me that the UK was running out of things to spend more money on in 2008/9, but I cannot help think this amounts to a failure of imagination: it is not as if UK infrastructure is great, there are no flood defence projects left to do etc. Above all else China’s example tells you what a huge mistake 2010 austerity was.
How China beat the Global Financial Crisis
Simon Wren-Lewis | Emeritus Professor of Economics, Oxford University
See also
The strongest argument for the adoption of any governmental system is success and the potential for greater success in the future. This is what the history changing Chinese reformer Deng Xiaoping meant when he stated, “It doesn’t matter whether a cat is black or white, as long as it catches mice”. Deng’s adoption of Market Socialism With Chinese Characteristics looked to bring the values of his predecessors into the future by creating an industrial revolution in a primarily agrarian economy which during Deng’s initial period in power had a poverty rate of 88%.
Today, Xi Jinping Thought on Socialism With Chinese Characteristics For a New Era looks to reduce an almost all rural poverty rate of 2% to 0% over the next two years while in the next decade China looks to become a moderately prosperous society for all its citizens. Furthermore, the drive to Create in China seeks to transform the country’s economy from one aimed at efficient production to one where production is increasingly mechanised and guided by artificial intelligence while Chinese entrepreneurs are encouraged to pioneer the next great leaps forward in technological, pharmaceutical and transport innovation on Chinese soil.
At a fundamental level, market socialism combines the individuated penchant for innovation in both utilitarian and luxury sectors that is associated with capitalism while regulating the inflow and outflow of capital in order to re-invest the proceeds of wealth back into the people and infrastructure of the nation. The result is a win-win internal developmental model which since 1978 has helped China to bring more people out of poverty in the shortest period of time in modern history.Eurasia Future
China’s Win-Win Market Socialist Model Baffles Western Capitalists and Communists Alike
Adam Garrie
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“Basic macroeconomic theory says that a negative shock to GDP, caused for example by falling exports, can be completely offset by a monetary and fiscal stimulus.” ~ Mainly Macro
FALSE
This claim is similar to the claim that imports are always a blessing. Both claims are false because both are proffered as universally valid, which they are not.
Suppose you live in Greece, whose government cannot create its spending money out of thin air. Since Greece has a huge trade deficit, Greece has no money coming in from abroad. Therefore in order to engage in fiscal stimulus programs, the Greek government would have to borrow more money, which would create more debt, which would lead to more austerity. Any stimulus program would be suicidal.
Suppose you live in Argentina, whose government can create its spending money out of thin air, but whose money is not accepted by foreigners as payment for their goods and services. Since Argentina has a huge trade deficit, Argentina has no foreign currency coming in from abroad. Therefore if the Argentine government creates more Argentine currency for a fiscal stimulus programs, this would boost consumer consumption, and consumer demand for more imports. This would further widen the trade deficit. In order to keep buying imports, Argentina would need foreign currency. In order to get foreign currency, Argentina would have to borrow it. We are back once again to the debt-and-austerity trap.
Suppose you live in a nation that has a huge trade surplus, and whose government can create its spending money out of thin air. In this case it makes sense for the government to engage in fiscal stimulus programs, since the government and economy can afford it.
Suppose you live in the USA, which has the world’s biggest trade deficit, but whose government can create its spending money out of thin air. Since U.S. dollars are accepted worldwide, it makes sense for the U.S. government to engage in fiscal stimulus programs, since the U.S. government and economy can afford it.
[Incidentally the article mentions fiscal and monetary stimulus. I don’t know what “monetary stimulus” means. Increased interest rates? Lowered interest rates? The article does not explain this.]
HERE’S THE DEAL...
Before we make universal statements about any nation's economy, we must first ask four basic questions.
[1] Does the nation have a trade deficit or a trade surplus?
[2] If a trade surplus, how big is it? If a trade deficit, how big it is? Is the nation crippled by foreign debt? Is the nation crippled by private domestic debt?
[3] Can the nation’s government create its spending money out of thin air?
[4] Is the nation’s currency accepted outside the nation’s borders?
The answers to these questions will vary from nation to nation. Therefore we cannot validly make universal claims such as, “Basic macroeconomic theory says that a negative shock to GDP, caused for example by falling exports, can be completely offset by a monetary and fiscal stimulus.”
It all depends on the answers to the above four questions.
Continued below…
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China is a special case.
In 2017 China had a $366 billion trade surplus with the USA. That’s good for China. However China’s trade surplus with the entire world has been gradually eroding for the last ten years, until by January 2018, China fell into a global trade deficit.
This is not a problem for China yet, since China has huge foreign currency reserves, including $6.06 trillion dollars on deposit at the U.S. Federal Reserve. China will use those foreign currency reserves to keep buying imports.
However if China’s trade deficit continues to worsen, such that China eventually burns through all its foreign currency reserves in order to keep buying global imports (as Saudi Arabia did) then China’s rise to power will end.
NOTE: This may explain the tariff increases that Trump has imposed on China. At the moment, China is vulnerable to Trump’s attack, since China’s global trade surplus has become a global trade deficit.
The USA had a trade surplus from 1945 to 1975. Since then, the USA has had the world’s biggest trade deficit. This is not a problem for the USA yet, since the U.S. dollar is accepted worldwide. Therefore the USA can keep buying imports.
Canada and the UK have gigantic trade deficits, but this is not a problem, since their currencies are widely accepted abroad. The U.S. trade deficit with Canada and Mexico is double the U.S. trade deficit with China. However Trump is not using tariffs to attack Canada and Mexico, since the latter are allied with the U.S. Empire.
If China’s global trade deficit continues to worsen, and China becomes desperate, we may be looking at a series of small wars that eventually become a world war involving China.
““It looks to me like the China economy is declining in growth,” said Kudlow. “It’s weakening almost across the board. And it looks like the People’s Bank of China is trying to pump it up by adding high-powered money “
ReplyDeleteIf what he means is the BOC is adding reserves “to lend out” then they might be headed for “The People’s GFC”....
https://twitter.com/markets/status/1025417544730062850
Konrad I've never read so much guff in my life.
ReplyDeleteAnd yes it is guff.
Balance of payments constraints
http://bilbo.economicoutlook.net/blog/?p=32931
The comments section alone disprove everything you write. If Neil Wilson got a hold of you he would put you over his knee and spank yer arse.
" “As noted above a CAD can only occur if the foreign sector desires to accumulate financial (or other) assets denominated in the currency of issue of the country with the CAD.”
Is it worth describing this from the other side of the coin and describe how an export-led growth country running an export surplus in a floating system would not be able to run an export surplus unless it did save foreign currency. And furthermore show that the saving of the foreign currency is how the export-led nation injects sufficient money into its own economy (via the discounting process in the banking system). And how this leads to the explicit or implicit ‘sovereign wealth funds’.
Ultimately an export led economy cannot afford to allow its customer to disappear because there is nowhere else to shift the exports to in aggregate. Overall world demand grows only with world income and exporting is a way of importing demand. So they either have to maintain the import of demand, or internal generate more domestic demand and do the substitution – which doesn’t happen overnight.
Moving capital around doesn’t seem to affect this underlying dynamic. Capital movements may be vast, but they are ultimately zero sum – unless the central bank starts reading the Volcker playbook again and acts as patsy in the market "
You have to have capital controls the central bank and if you don't issue debt you can use the ways and means accout instead.
The commercial banks do as they are told or lose their licence.
You keep saying in the current globalistic world this is what would happen. We are saying no wouldn't we are not interested in the current globalistic set up we are going to change it. Protect our nation and become more protectionist.
FDI fine lets talk about FPI Aand no if you are wanting to sell your goods here you can only do what we say.
@ Footsoldier:
ReplyDeleteThank you for your response. The first time I read one of your comments, I had no idea what you were trying to say. I dismissed it as gibberish. Just now I tried to read your comment above, but it too is quite unintelligible. Rather than refute me point-by-point, you spout more meaningless babble.
So be it.
The fact is, if your nation has a trade deficit with the world, and if your government cannot create its spending money out of thin air (or if it can, but the currency is not accepted outside its borders), then your economy will be in trouble. PERIOD.
No amount of irrelevant blather will change this fact.
Foot,
ReplyDeleteJust keep exporting the single malts pls..... whatever else you do....
Konrad, Re your first comment above, and your point that the Greek government cannot implement stimulus because it is part of a monetary union, I've read abaout a hundred articles by Wren-Lewis and commented on about 50 of them. I'm 99% sure he is aware of your point. I.e. his failure to mention it was a slip up by him: it's not that he does not understand your point.
ReplyDeleteRe a country like Argentina whose currency is regarded as near worthless around the World, stimulus by the Argentine government would not (as you suggest) boost imports much because if your currency is near worthless, imports will he horrendously expensive.
“Re a country like Argentina whose currency is regarded as near worthless around the World, stimulus by the Argentine government would not (as you suggest) boost imports much because if your currency is near worthless, imports will he horrendously expensive.” ~ Ralph Musgrave
ReplyDeletePerhaps you missed the point. I shall repeat it…
[1] Argentina has a severe and growing trade deficit with the world. In July 2015 it was about 70.89 billion pesos per month (USD $2.5 billion). Now the deficit has grown to $261.7 billion pesos per month (USD $9.6 billion), and keeps rising. Each month another $9.6 billion is sucked out of Argentina.
[2] A trade deficit means that demand for imports is not balanced by exports.
[3] Argentina’s currency is not accepted outside Argentina’s borders.
[4] Therefore, in order to keep buying imports, Argentina must get foreign currency.
[5] In order to get foreign currency, Argentina must borrow it by taking loans from banks and the IMF, and by selling sovereign bonds (i.e. treasury certificates).
[6] Argentina has no hope of ever paying back these loans in monetary terms. Therefore Argentina pays back the loans by giving its public assents to Argentina’s creditors, and by surrendering control of natural resources to transnational corporations.
[7] Therefore any fiscal stimulus program by the Argentine government would worsen this nightmare. Indeed, Argentina’s government is forced to reduce consumer demand by imposing austerity in the masses, whether the government wants to or not.
These points are quite simple, yet they are beyond the grasp of mentally challenged individuals like “Footsoldier.”
“Re your point that the Greek government cannot implement stimulus because it is part of a monetary union, I've read about a hundred articles by Wren-Lewis and commented on about 50 of them. I'm 99% sure he is aware of your point. His failure to mention it was a slip up by him: it's not that he does not understand your point.” ~ Ralph Musgrave
Wren-Lewis's error is not merely a slip-up. For reasons I explained above, we cannot legitimately make blanket universal claims such as, “Basic macroeconomic theory says that a negative shock to GDP, caused for example by falling exports, can be completely offset by a monetary and fiscal stimulus.”
Oh? What if your government must borrow its stimulus money? What if your government can create its stimulus money out of thin air, but doing so would boost consumer demand, thereby worsening your country’s trade deficit and foreign debt crisis?
“Foot soldier” (above) has no answer for these questions, and therefore resorts to meaningless gibberish.