Sunday, July 24, 2005

Revaluation and reactions

Below are two enlightening comments which appeared on Brad Setser's blog, discussing the revaluation and related macro topics.

CSFB has the right perspective, think of it as transferring two percentage points of purchasing power from a country (USA!) with a low personal savings rate to a country with a high PSR :D

then, keep in mind that ~2/3 of the PRC's pop. still resides in the 'countryside'/local villages whose average wage is 45 cents/hr...

then note the revaluation of capital that globalisation has wrought relative to labor...

http://www.investorsinsight.com/otb_va_print.aspx?EditionID=157

"Harvard economist, Richard Freeman, has calculated that the global workforce has doubled since the fall of the Iron and Bamboo Curtains as a result of the effective addition of workers from China, India and the former Soviet Union. According to Freeman, the capital/labor ratio has been lowered to 55%-60% of what it would be otherwise, thereby reducing the return to labor and increasing the return to capital. As Freeman said, "A decline in the global capital/labor ratio shifts the balance of power in markets toward capital as more workers compete for working with that capital." Based on Freeman's calculations, thirty years will need to elapse before the global economy returns to the capital ratio that existed when the Iron Curtain fell. If true, this implies an extended period of low inflation."

cf. http://www.morganstanley.com/GEFdata/digests/20050721-thu.html#anchor0

...lex goes on to note that this arrangement will continue to invite speculation and bubbles, but i would just note that this unstable equilibrium continues to be in the best interest of both parties, at least over the near-term, and as long as 'measured' steps -- so as not to destabilise the unstable equilibrium -- are being take to reduce imbalances in the long-run, then the longer this arrangement can last and eventually (hopefully) morph into something more stable :D

and...

...There is an enormous flow of capital and money out of the industrialized world. Some of it does return in terms of profits and salaries, but a good percentage of those profits never find their way into public coffers. The rich get very rich. There is no way longer any way of really getting a slice of those profits to pay the national bills. In addition, downward pressure on average wages continues.

Cheap labor has been substituted for investment. Credit is cheap. With profits and cheap labor at these quantities, who needs credit? I do not see this as a conundrum. The pump has been primed from every conceivable direction: tax incentives and cheap labor abroad, tax cuts at home.

Ten million Chinese work for a foreign enterprise. The size of that cheap labor force is staggering. And it is only a tip of the Chinese iceberg. And we have yet to touch India. We are living through a boom economy, except the boom is not really heard here. We are paying for it. The dimensions of that boom cause Chinese entrepreneurs to open fake off-shore businesses, pose as foreign investors, and then be eligible for all the goodies--roundtrip investors, they are called. With credit like this, is there any wonder that capital returns cannot be measured by real interest rates? Hell, I should start such a business. Bet doing so is dirt cheap. No loans required. And, you do not needed real investment in automation or equipment when labor is dirt cheap. Look at what the Egyptians did with the pyramids, or the Chinese with the Great Wall.

Normal Keynsian economics was not prepared for anything like globalization of this magnitude or style. There is a glut of capital and credit and labor. And it is coming at the American taxpayer's expense. The average American consumer is going deeper and deeper into debt. Average credit card debt in the U.S. is over $9000. And the interest rates are hefty there! And then place that number against the median wage: credit card debt then becomes one-fourth of the median wage. Some are living on a knife's edge here.

When the bubble does burst, who will pay the bills, personal and national?

The knot that has been tied is Gordian, as Volcker says. There is no easy way out of this one. We cannot wait until China becomes a "consumer society"-- a ten or fifteen year pipe dream. After China, there is India. After India, who knows.

1 comment:

Sterling Wysong said...

I am looking forward to your posts.

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