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China hates QE

Posted by WARREN MOSLER on November 27th, 2012

This was my suspicion back in maybe May, 2011 when Bernanke made his strong dollar speech after China had let their T bill portfolio run off after the Fed had begun QE1.

Either China doesn’t understand QE or they are taking this position anyway, for further political purpose.

And in any case, in general they all remain blind to the fact that imports are real benefits and exports real costs.

China dismisses Brazil currency proposal at WTO, criticizes QE

By Tom Miles

Nov 26 (Reuters) — China blamed quantitative easing for damaging emerging economies and rejected Brazil’s proposal of using world trade rules to compensate for currency misalignments, during a debate at the WTO on Monday.

“We, together with many other countries, have been critics of this irresponsible and beggar-thy-neighbor policy,” China’s deputy permanent representative to the World Trade Organization, Zhu Hong, said, referring to the monetary stimulus policy often shortened to QE.

“It has a lingering negative impact on developing, emerging economies in particular,” Zhu said during a debate on currency fluctuations at the WTO in Geneva, according to a transcript provided by a Chinese official.

The meeting was called to discuss Brazil’s proposal that WTO rules should include a system for dealing with currency misalignments.

Brazil’s Ambassador Roberto Azevedo, who some trade diplomats say is a contender to replace WTO chief Pascal Lamy when he steps down next year, has gradually hardened up his demands on the issue.

After getting WTO members to agree to examine the available literature on the subject last year,Brazil circulated a proposal on November 5, explaining that WTO rules contained language about dealing with currency-related trade distortions but no adequate instruments to act directly.

“The WTO seems to be systemically ill-equipped to cope with the challenges posed by the macro and microeconomic effects of exchange rates on trade,” Brazil said in its proposal, a copy of which was obtained by Reuters.

“Members may wish, against this background, to consider the need for exchange-rate trade remedies and to start some analytical work to that effect.”

The proposal did not mention quantitative easing and explicitly called for analysis “from a systemic perspective” rather than from any one country’s experience.

But it was accompanied by a graph showing the estimated misalignment of Brazil’s own currency, the real, with an over-valuation of nearly 40 percent in 2011.

Brazil has previously called quantitative easing, a form of monetary stimulus, “selfish” and blamed it for stealing exports from emerging markets.

But China’s Zhu said the issue was one for the International Monetary Fund, not the WTO.

“Currency issue in nature is a monetary policy issue. The right path to resolve this issue is by enhancing the responsibility of and promoting coordination among the international reserve currency issuers,” Zhu said.

BAD PRECEDENT

Brazil’s push for the WTO to take up the currency proposal has rolled onward despite struggling to gain vocal support, partly because it is unclear if such an idea would be workable in practice.

Donald Kohn, a former vice chairman of the Federal Reserve and a member of the Bank of England’s Financial Policy Committee, said that although he was not familiar with the proposal, such ideas did not make sense from an economic point of view in general.

“Emerging market economies should adapt, and they should change regulation to allow their exchange rates to be more flexible where that’s appropriate,” he told Reuters after giving a speech in Geneva earlier this month.

“But I think it’s not going to work and I think it’s unproductive to ask the industrial economies to do things that are not in their self-interest, within the rules of the game. Secondly, if what they’re talking about is tightening up on trade and restricting trade, that’s a very bad precedent.”

67 Responses to “China hates QE”

  1. lula Says:

    Maybe China exports a lot so they can get the dollars to pay for the oil they need so much? In that sense, maybe its export would no be a “detriment,” as Warren states? Dollar is, at least for another while, the world currency. Thanx for inputs.

    Reply

    WARREN MOSLER Reply:

    first, exports are real costs, not necessarily ‘detriments’ etc.

    second, china net exports and builds fx reserves

    Reply

    Unforgiven Reply:

    @WARREN MOSLER,

    Bottom line, they’re bugged because they couldn’t get all the Treasuries they wanted?

    Reply

    WARREN MOSLER Reply:

    the think qe ‘devalues’ their dollar holdings somehow

    walter Reply:

    @lula, Exports to enable necessary imports make sense, but that is something else than becoming a huge net exporter, running huge trade surpluses.
    Do not forget that net exporters can only exist if others are net importers. So, this net exporter model cannot be the model for the world as a whole.

    Reply

  2. Dave Begotka Says:

    My research shows they dislike QE for most of the same reasons I do……….all the corporate welfare lobbied into place that is poisoning our cash flow and choking the 99%……

    Reply

  3. Bo Says:

    They probably truely don’t understand QE. I had a chat with an old friend who is now a middle level offical in the foreign ministry. He is focusing on China’s US policy. He told me they had discussions with officials from PBOC and the ‘experts’ in the Chinese central bank assured them China’s mass holding of US debts is a weapon and leverage against US. It’s kind of shocking they truely believe these just like the US politicians.

    Reply

    Adam (ak) Reply:

    @Bo, I am not convinced. The inner circle of leadership has very little interest in explaining the Westerners that austerity equals economic and social suicide. They have every interest in telling the Westerners: “jump out the window, jump”. And this works…

    It is almost as good as convincing Gorbachev to thrash the already ailing Soviet Union’s economy and install the neoliberal system in the late 1980s.

    The mass holding of US liabilities is a weapon in the sense that it can be used to destroy the current international currency arrangements (“dollar hegemony”) and severely upset the exchange rates. Not in the sense that the Chinese or Russians can force a public debt crisis in the US similar to what is currently going on in South European countries. The latest example of how the “dollar hegemony” works was in Egypt (I have already provided a link).

    In what sense “exports are real losses”? This sentence while obviously true when read out of context, describes only one side of the coin. The other is that export of manufactured products surplus leads to increased investment in manufacturing. The Chinese are no longer interested in exporting low-value-added goods, they rapidly move up the ladder. The global economic hegemony of “China Inc.” is probably inevitable because the Chinese have managed to enter almost all the product manufacturing food-chains. This gives real power and control over international corporations. In the end this will give China enormous political leverage.

    Reply

    Edmund Reply:

    @Adam (ak),

    @Bo, I am not convinced. The inner circle of leadership has very little interest in explaining the Westerners that austerity equals economic and social suicide. They have every interest in telling the Westerners: “jump out the window, jump”. And this works…

    But a stagnant US economy hurts China’s growth, which – among their many concerns – has overwhelming primacy, even supremacy.

    I think the stupidity hypothesis is more convincing, at the moment.

    Reply

    Adam1 Reply:

    @Edmund,
    “But a stagnant US economy hurts China’s growth, which – among their many concerns – has overwhelming primacy, even supremacy.”

    Only if you see China as dependent on the US importing goods. We know from MMT that the issuer of the currency can always afford full employment. Therefore China is NOT dependent on exports to the US.

    Adam (ak) Reply:

    @Edmund,

    I think that a stagnant US economy is exactly what the Chinese want to see as the prices of raw minerals would decrease. The Chinese are also engineering a “pivot” – an economic one – towards increasing the role of the domestic consumer demand in driving the economy. We cannot blindly apply mental models from 2007 in 2012 – the situation is changing. The Chinese leadership must understand that export surplus comes at a real cost. I still argue they are not that stupid. As long as the costs are outweighed by indirect benefits the previous policy makes sense. When these relative benefits decrease – they have other means of stimulating the aggregate demand so that productive capacities are highly utilised and keeping the investment rate high enough to grow the GDP.

    A sudden and deep crash in the US caused by a “fiscal cliff” would obviously be very bad for the Chinese due to a risk of a further misallocation of real resources (a housing bubble or something similar).

    Cesar Reply:

    @Bo,
    Bo said: “the ‘experts’ in the Chinese central bank assured them China’s mass holding of US debts is a weapon and leverage against US”

    But it *is* a weapon as long as the US powers-that-be *think* that it’s a weapon. It’s similar to those stories about people robbing a Bank when all they had under their jacket was a banana – but the clerk thought it was a gun…. Perception is reality.

    When MMT is finally understood in the corridors of power, will be exactly the same time that the Chinese ‘weapon’ is revealed to be but a banana!

    Reply

  4. IJR Says:

    There are a great number of benefits to exports:

    1) Generating foreign currency to purchase goods and services globally.

    2) Improving the manufacturing base as there will be a crossover point where the Chinese will be the buyer of their own manufacturing output.

    3) Educating the labor force for the long term benefit of the Chinese people.

    4) Lower costs and higher standard of living that comes with comparative advantage.

    5) Work ethic.

    Warren: you used to say, and I paraphrase, “let’s take this to an extreme where the Japanese give us everything we need to live for free, should we punish them and sanction them?” The cost in that extreme scenario is that we become fat, lazy, uneducated, and militarily vulnerable.

    Reply

    WARREN MOSLER Reply:

    you’re talking about my kids…
    ;(

    Reply

  5. sw Says:

    The odds that anyone with power in China understands QE is vanishingly small. It’s politically expedient for them to blame unpleasant domestic issues on foreign boogeymen. Blaming the Fed’s QE for high domestic inflation is a layup. Chinese inflation isn’t even that high now that the economy is cooling and the food price squeeze has passed. These complaints don’t make sense at present, even if you wrongly believe that QE is the root cause.

    Many of the powerful Communist Party cadre received their economic training from fancy US econ departments. They are fully on board with the usual neoclassical gibberish.

    The QE scapegoat is convenient, and they almost certainly actually believe it.

    Reply

    Adam (ak) Reply:

    @sw, This is what we are supposed to believe in. This is just plain propaganda obfuscation for the “unwashed” in the West.

    Please look not at how they speak but at what these guys are doing – what their real budget deficit is (including local gov “borrowing” from state owned banks).

    Or if you are really curious, go and check with Google the content of the “uploads” directories on the file-servers of some of the Chinese universities. These are usually not password protected and you’ll see various books copied there. You’ll see what they REALLY study.

    http://www.cssn.cn/upload/2011/05/d20110530165436593.pdf

    Inflation was a result of the housing bubble, now fully tamed.

    Reply

  6. sw Says:

    Interesting link to the the Pushan Award site. It would have been difficult to become and economist in Communist China in the 1940s and not share some intellectual heritage with Marxist economists like Kalecki. Nonetheless, it’s a huge stretch to conclude that all the rhetoric coming out of the PBoC and the Ministry of Commerce is an elaborate hoax to mask their deep understanding of MMT.

    Take, for example, their byzantine monetary system. They set the level of required reserves and let the 7-day repo rate fluctuate wildly, similar to the Fed’s foray into madness under Volcker. They are experimenting now with doing more OMOs to avoid more permanent Reserve Rate Ratio changes. There is zero evidence they understand the implications or lack thereof in these policies.

    There is no question they ran a large “budget deficit” via the state banks lending to SOEs during their stimulus / infrastructure push. In Chinese political circles, this is now widely regarded as having been a mistake that led to high inflation – not as a welcome exercise of their power to run expansionary fiscal policy.

    It can be easy to overestimate “the enemy”, like when American intelligence consistently believed Soviet output was running much higher than it way. I see no evidence that any policy makers in China have any more of a clue than Congress does. Most of the time, even Congress can figure out that more “borrowing and spending” is good for the economy.

    Empirically speaking, there is no evidence that having a full understanding of monetary economics helps you to ascend the bureaucratic or electoral ladder in any policy making organization. I can’t name one central banker who meets that criterion (maybe Bill Dudley?). With that as your prior and China’s policies as your evidence, I would still conclude they are clueless – just like the rest of them.

    Reply

    Adam (ak) Reply:

    @sw, Have you read
    http://www.amazon.com/Party-Secret-Chinas-Communist-Rulers/dp/0061708763
    ?
    For the decision makers at the Standing Committee of the Politburo all the monetary “theories” matter very little. They need to have a knob on the dashboard which gives them control over the economy. In the end bank lending is not restricted by the level of reserve ratios. The red phone rings and the instruction how much to lend and to whom comes along that channel. On the other hand China is a large country with a lot of autonomy or even “anarchy” at the local level.

    The key cultural difference between China and the West (including to some extent Russia) is that theories are tools not the “truth”. Nobody cares about the “truth” and “absolute values” in China. It is enough that the cat catches the mice…

    From that point of view I think that they are not clueless at the Central Bank of China. We may be clueless about the way they think and act if we are confined within the realm of Christian and Greek philosophy and taking the so-called “ideas” at a face value.

    Did you ever try reading from different language versions of the same official Chinese website in English, Russian and then running a Google translation of the Mandarin version? Even the Russian version is not the same as English.
    http://english.mofcom.gov.cn/
    http://russia.mofcom.gov.cn/

    I lived long enough in a communist country to assume that everything they say is carefully crafted propaganda.

    Also – Kalecki was not a Marxist.

    Reply

    SteveK9 Reply:

    @Adam (ak), I’ve speculated in a few places that the underlying major fact that may keep China rolling along, is that the leadership seems genuinely concerned about unemployment. They will use the monetary system to keep people working, no matter what. They may make enough mistakes to cause a problem anyway, but keeping everyone working provides a solid base.

    What do you think?

    Reply

    Adam (ak) Reply:

    @SteveK9,

    I agree that high unemployment would lead to a revolution and everyone in China understands this. I think that we need to put the whole thing in a different perspective.

    We need to remember that before the reforms begun circa 1978, there was no unemployment in China as the economy conformed to the orthodox communist model.

    For someone who grew up in such a country there is no question whether the government (central bank) can or cannot “print” money. All the money is “printed” in a communist country and the government usually doesn’t need to bother issuing debt instruments (bonds). When the government was unable to set the prices at the appropriate level due to the risk of sparking riots and because of the need to subsidise certain sectors of the economy, the result was a budget deficit (taxation was less relevant). This deficit was financed by “emission of money” and led to an inflationary overhang since the economy run at the full capacity in regards to production of consumer goods. People had money but there was nothing to buy for it. In theory the command economy should be immune to inflation but because of the imperfections I mentioned above and tentative attempts to reform the system, imbalances did persist.

    We need to keep in mind that from the microeconomic perspective socialism was an utter disaster. Unless workers were terrorised like during the Stalinist period, very few people ever bothered to work.

    My early childhood memories of money are images of coins made of aluminium and paper notes. It was obvious that the value to these objects was given by the government. I only heard about “creation money by credit” when I was at the uni and had an Economics 101 course. I was not interested in economics at that time, we had to “study” it (to some extent) because it was compulsory.

    This is the reason I did not need any “conversion” to MMT – my first rather naive comment on Steve Keen’s blog was something along these lines: “but the government can always print money if there is a debt deflation so why are you telling us that a depression is inevitable?”.

    Let me reiterate this again. The whole Chinese (and Russian) leadership takes these things for granted. For them monetarism and all similar stuff is something they might have learned or (as in Russia in the 1990s) temporarily converted to. But everyone knows that the government does not need to acquire the pre-existing commodity called money. Some people may believe in the naive monetarism so that they may be reluctant to print too much money out of fear of sparking inflation when repressed inflation becomes real. Please be aware that when saving propensity is close to zero then the monetarist theory could actually be applicable. But this doesn’t mean that there must be unemployment.

    Unemployment in Poland was created when a conscious decision to nuke the socialist economy was made in the second half of the 1980s. The Chinese did not wan to go in that direction, they left the old inefficient state-owned behemoths also to provide a buffer of jobs.

    The Chinese simply have a totally different mindset than all of you, Western educated guys. They have lived on a different, “red” planet. You’d better stop once and for all thinking about China as a capitalist country. This is a country with a mixed model called “socialism with the Chinese characteristics” and probably about 50% of the economy is and will always be state owned. You see all these big corporations like Lenovo or Huawiei which seem to be privately owned. First they are owned by the people dependant on CCP and secondly to “own” means something different there, they are privately administered and that’s about it.

    I should have written it much earlier. This is the key thing. Sorry I have to skip a few details as I need to go to work soon but this is really a fascinating topic.

    The key issue in reforming socialism is not the deficient aggregate demand but supply-side shortages and abysmal productivity. For them unemployment is not a serious systemic issue like in a capitalist economy. They need to discipline some workers and simply don’t want to feed the lazy people. They can employ everyone in state owned farms or similar pseudo-enterprises. But switching back to pure command economy is simply not wise as the living-fossil exhibit called North Korea demonstrates that the orthodox model is dead. China is a very capitalist country when it comes to the microeconomic environment. I would say that it is closer to laissez-fare than the US because there is no intellectual property rights idiocy which is throttling good competition and technological progress in the West and because there is less environmental regulation (what is actually bad).

    But China is and will always be a socialist country when it comes to macroeconomics as long as CCP stays in power – despite all the subversive actions of the Western “foundations”, media outlets, religious groups and Western educational institutions peddling neoliberal propaganda to the Chinese elites. Because they know it didn’t work in Russia and even doesn’t work in the West proper.

    Finally, the Chinese opened up the economy and embarked on a export-led development strategy. I am sorry but I have to mention this again – the statement that their exports are real losses misses the point. Repeating “read the 7DIF” does not add any value to the debate.

    I hope I have given you enough rope to be able to read the Chinese media now.

    Edmund Reply:

    @Adam (ak),

    Everything you wrote here was incredibly enlightening. Cheers.

    Reply

    Keith Newman Reply:

    @Edmund,
    I too enjoy Adam (ak)’s comments very much and always look forward to them.
    Thanks Adam (ak)!

  7. Clint Ballinger Says:

    Warren writes “And in any case, in general they all remain blind to the fact that imports are real benefits and exports real costs.”
    Can someone elaborate on this, or point me to where Warren does?
    Cheers

    Reply

    WARREN MOSLER Reply:

    start with the 7 deadly innocent frauds on this website thanks

    Reply

    Clint Ballinger Reply:

    @WARREN MOSLER,
    Thanks. I read it. I very much agree with the basic MMT insight on the domestic economy that we are as rich as what we produce, (and to try to nutshell it extremely) we can always fund things like Social Security, and funding other productive things will make us better off regardless of the bookkeeping.

    So, when the same idea is moved to the international arena, we are as rich as what we produce plus imports minus exports. Like with the domestic economy, this accounts for the real facts on the ground, and the bookkeeping does not change that, but people focus on the bookkeeping instead of the fact that we are richer when we import more than we export.

    My main question is, with the domestic economy this works because we are our own currency issuer. We control the levers, and if it is done well, we can circulate currency in a way that maximizes production and welfare, and again, the bookkeeping doesn’t matter per se.

    But when this is taken to the international arena are you saying that the credit money we create that allows us to export more than we import, does not eventually form a bubble somehow somewhere and affect the domestic money system in some negative ways?

    Or is it just a different way of saying the common idea that floating exchange rates will eventually even everything out (US dollar gets weaker, we import less, export more, all relatively painlessly)?

    If the former, do you mean that we could run the economy in the US with MMT principles, not worrying about debt in the way most do, and in effect get a free ride because for whatever reason everyone else still is willing to take US dollars for real goods?

    You have said “taxes function to regulate aggregate demand, and not to raise revenue per se”. In a domestic economy that issues its own currency like the US I see that.
    But outside of the domestic economy, where a country does not have the power to tax, might this be correct?:

    “The ability to export (especially relatively small amounts of high-value-added-goods for much larger amounts of other people’s regular goods) is how a country ‘taxes’ the rest of the world so that it is able to import” (?).
    ——-
    A separate issue: What about agglomeration effects, especially in the high-tech sector (?). One can argue that just discussing “imports” and “exports” misses the key difference between high- and low- returns-to-scale products.
    Exporting low returns-to-scale products is bad; exporting high returns-to-scale products (technology) is good. We get much more of the worlds low returns-to-scale production for very little high returns-to-scale product (we live better), and additionally, high returns-to-scale jobs tend to cluster – better to let them cluster in the US. I would rather work at Google than be a miner.
    Does MMT address any of these issues? (yes, this is a form of mercantilism, which is generally greatly misunderstood).
    Clint Ballinger

    Reply

    Clint Ballinger Reply:

    @Clint Ballinger,
    PS Sorry, I meant to write thanks, and say that these are friendly questions, I just want to get my head around the MMT position on trade.

    WARREN MOSLER Reply:

    all the right questions!

    I don’t see a trade deficit, like the US, UK, Australia, etc. somehow doing something bad to our monetary system.
    worst case for us foreigners start spending their US dollars here causing unemployment here to get ‘too low’ and labor costs get driven up some until they are done spending their excess cash.

    yes, floating fx keeps it all at ‘indifference levels’ continuously

    yes, just keep domestic demand at full employment levels and let the trade balance go where it wants to.

    while your net imports are a cost to the rest of the world calling it a ‘tax’ implies it’s coercive?

    yes, the trick is to optimize real terms of trade, which in general means importing as much net ‘labor content’ as possible

    Adam (ak) Reply:

    Warren,

    If the true meaning of the statement “we should not be concerned with current account deficits as long as foreign liabilities remain denominated in domestic currency” is that “it is NOT doing anything bad to our monetary system” then yes, it is difficult to argue against that view.

    I agree that monetary system is not going to be affected, the US government sector can always service the public debt.

    I am not addressing the purely political implications of the Dollar having or not having the special “reserve currency” status.

    I still think that you need to further clarify the point about export and import in 7DIF. Reading the example about the benefits of importing cars from Japan one may get an impression that running persistent trade deficits even while full employment is maintained will never have side effects for the productive economy.

    I agree that “keeping domestic demand at full employment levels and letting the trade balance go where it wants to” is a valid recommendation provided that the government of the trade deficit country protects certain strategic industries. The reason why I repeatability question the blanket assumption that “she’ll be all right” is that the process of adjustment of productive capacities and accumulation of working capital is not instantaneous. It also involves “human capital” – adjusting the skills of the workforce. The process of adjustment of consumer behaviour and substitution of imported products by locally made is also not instantaneous. Only if the balance between consumption and productive investment is not upset in the trade deficit country, trade deficit can be beneficial.

    Otherwise if for example the de-industrialisation process takes place, the long term effects of the misallocation of resources can be tragic to the economy and society.

    I would argue that trade surlpus has been a tool of ramping up investment in the Chinese economy even if it further sacrificed the consumption level.
    http://www.economist.com/node/21555762
    The Chinese growth strategy may actually have started changing already.

    Let me give an example of rare earth mining and processing capacities – how long does it take to restore these capacities? From what I have heard the Chinese near-monopoly was used as a trade weapon against Japan in the territorial dispute.

    The Lerner-Marshall condition is often not met in the short run.
    http://en.wikipedia.org/wiki/J_curve#Balance_of_trade_model


    There are signs that PBoC changed its approach to accumulating foreign currencies. Could you comment on the following article?
    http://www.alsosprachanalyst.com/economy/changing-pattern-of-chinas-money-flows.html
    Trade deficit persists but current account surplus has shrunk. Wouldn’t it mean that the Chinese enterprises started recycling they surlpus foreign revenue into foreign investment? One may imagine that at some point of time in the future the Chinese will start importing “net ‘labor content’”…

    WARREN MOSLER Reply:

    for all practical purposes i agree with all you say

    Clint Ballinger Reply:

    @Clint Ballinger,
    “while your net imports are a cost to the rest of the world calling it a ‘tax’ implies it’s coercive?”

    No, I don’t mean that at all. I just mean that what you say about taxes in the domestic economy ” “taxes function to regulate aggregate demand, and not to raise revenue per se”.
    - earnings from exports (not coervice exports) have a similar function in the internatinoal arena.

    So I suggested in the international arena:

    “The ability to export (especially relatively small amounts of high-value-added-goods for much larger amounts of other people’s regular goods) is how a country ‘taxes’ the rest of the world so that it is able to import”.
    I don’t mean to imply coercion, just a similar function.

    WARREN MOSLER Reply:

    I hear you, and exports do provide fx that can buy imports.

    so you can say it’s like a tax in that it ‘raises fx revenues’ etc.
    but unlike a tax it’s not coercive.

    Clint Ballinger Reply:

    Warren or Adam – do you have any thoughts (Adam touches on it) on the second part of my question? That there are other costs and benefits to importing and exporting that MMT, finance etc. does not capture?
    And about the crucial difference between high- and low- returns to scale products, an effect still further amplified by high-tech agglomeration(?) As I put it “I would rather work for Google that be a miner”.
    (again these friendly questions I really think some MMT insight on these ideas could be useful, or vice versa).

    WARREN MOSLER Reply:

    yes, all part of real terms of trade, though indirectly?

    and while you would ‘rather’ be whatever you still need to be qualified, etc. and ‘market forces’ at least in theory sort a lot of that out as well?

    Clint Ballinger Reply:

    @Clint Ballinger,
    PS I didn’t catch at first that your reply “yes, the trick is to optimize real terms of trade, which in general means importing as much net ‘labor content’ as possible” in part captures what I am saying –
    that our high tech/increasing returns to scale exports net more “labor content” from the rest of the world.
    I do think it is useful to spell this out really clearly though – to really think about why low returns to scale exports are “bad” and high returns to scale “good”.
    I try to capture this some of this detail through discussing a chart showing the relationship of the ratio of increasing returns production (manufacturing) and decreasing returns production production (raw materials) using most of the countries in the world (p. 11 here http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2164912 ). The chart is fascinating to consider – the way these countries are spatially autocorrelated (and why it matters) I show on p. 132 here http://www.academia.edu/450987/Initial_Conditions_as_Exogenous_Factors_in_Spatial_Explanation )
    Cheers, Clint

    Clint Ballinger Reply:

    @WARREN MOSLER,
    You write
    “and while you would ‘rather’ be whatever you still need to be qualified, etc. and ‘market forces’ at least in theory sort a lot of that out as well?”

    Of course the Google thing is a bit of a joke, meaning the US (or wherever) will be richer and happier as a nation with more Google-type jobs than raw material or low-tech jobs (not that there is anything wrong with some healthy farmwork, crafts, etc., but I doubt most Americans really want to do what it takes to live off the land).

    On market forces – What I am saying is what we export will change those market forces dramatically.

    Of course a well educated (or well trained is a better word I think) workforce is central to this. My main point is that there are potentially very positive knock-on effects from exporting increasing returns to scale goods. To the extent taxes, educational goals, and any other government policies exist they should keep the positive effects of exports in mind.

    I imagine many people are shocked when you say exports are bad. They just think “but selling stuff is good!”

    I didn’t see much elaboration in 7DIF (you speak about cars). Is there any chance your idea about the negative effects of exports (that seem surprising to some) is in part based on thinking about exports of things low on the supply chain, and esp. raw materials? This would mesh very well with the more sophisticated views on mercantilism, which neoclassical economics has completely and utterly wrong (not surprisingly). Contra neoclassical theories of trade, in the real world there is an international division of labor and our wealth and material comfort depends on our place in it.

    Eric Reinert has a fascinating body of work on these ideas, the most applicable to this post is probably here

    http://www.academia.edu/1407787/Rich_Nations_Poor_Nations

    Reinert, Eric S. 1996. ‘The role of technology in the creation of rich and poor nations: Underdevelopment in a Schumpeterian system’ in Aldcroft, Derek H. and Ross Catterall (eds.), Rich Nations – Poor Nations. The long run perspective. Aldershot: Edward Elgar, pp. 161-188.

    PS The anti spam codes are a little harder now – maybe they should keep getting harder for each reply-only someone with advanced calculus could reply after a while :)

    Reply

    WARREN MOSLER Reply:

    export michael jackson tunes and import oil…
    ;)

  8. Jeff Burek Says:

    Buffett shooting down payroll taxes, emphasizing need revenue/deficit gap
    http://www.cnbc.com/id/49984648

    +

    Apply this to the country
    http://www.nytimes.com/2012/11/27/opinion/brooks-how-people-change.html

    =

    Getting somewhere

    Reply

    hoonose Reply:

    @Jeff Burek,

    Of course Buffett is mostly right. And if there was ever a time in our course of human events, today is the day for another major Warren to make headlines as to why the Federal is not your Daddy’s debt.

    Reply

    ESM Reply:

    @Jeff Burek,

    Buffett is not mostly right. He’s mostly wrong. The only thing I agree with him on is that the payroll tax is a tax, but even here, there’s a reasonable argument that it is more akin to an onerous regulation than a tax.

    For example, suppose the government required you to spend 6.2% of your wages below $110K to buy an annuity from an insurance company which starts to pay out when you turn 65? Is that a tax or a regulation?

    Or suppose the government required you to buy deferred lifetime health insurance that kicks in when you turn 65? Tax, or regulation?

    Historically, it has been the Democrats who deny that the payroll tax is a tax. The reason is that once the public recognizes that it is a tax, which is largely disconnected from the benefits which flow in the future, the benefits will be turned off for the rich, soon thereafter the affluent, and then, within a few decades, it will become just another welfare program which will be squeezed for funding.

    Reply

    Nihat Reply:

    @ESM,

    I don’t follow the logic in your last paragraph. Payroll tax is a tax. I never thought it wasn’t. But why should that cause the benefits to be turned off for the rich, the affluent, so on?

    Reply

    ESM Reply:

    @Nihat,

    Politically, it has never been considered a tax. It was always considered a mandatory contribution into a pension and insurance system.

    If the politics changes so that it is considered a tax, which necessarily is disconnected from the benefits which are paid out to the elderly, then people will start to wonder why the government is making transfer payments to rich elderly people. I already wonder about that. Why should Warren Buffett get a social security check? He does, you know.

    So then there will be a push to deny benefits to anybody above a certain wealth level, or income level, or whatever. And of course that makes sense. But then social security evolves to be a welfare program for the elderly poor, which is what it always should have been. But the Dems have a saying, which is “a program for the poor becomes a poor program.” They know that, politically, an entitlement for the poor is the first thing on the chopping block when there is a perceived need for budget cuts. After all, the poor don’t have political clout. I think this analysis is probably correct. So, the stategy all along, from the very beginning of the Social Security program during FDR’s administration, was to argue that the program is a defined benefit pension program in which everybody must participate, rich and poor alike. That way, when Repubs say they need to cut benefits, the relatively comfortable old geezers will fight like hell to keep getting their $1200/mth.

    It is one of the biggest political ironies of all time that it is the Dems who have pushed for and sustained one of the most regressive taxes of the modern era, all done to protect a social safety net that they hold dear. I say one of the biggest ironies only because most Dem social policies are like this. They have unintended consequences which tend to hurt the people that they claim to want to help.

    Nihat Reply:

    ESM, okay, thanks for the explanation. Without MMT, the world is a contorted place… :)

    Greg Reply:

    @Nihat,

    @ESM

    “Why should Warren Buffett get a social security check? He does, you know.”

    Cuz he paid in. It doesnt COST us any more to pay all the billionares a few thousand a month, you know that. Denying him payments would not make more available for someone else

    “So then there will be a push to deny benefits to anybody above a certain wealth level, or income level, or whatever. And of course that makes sense. But then social security evolves to be a welfare program for the elderly poor, which is what it always should have been. But the Dems have a saying, which is “a program for the poor becomes a poor program.” They know that, politically, an entitlement for the poor is the first thing on the chopping block when there is a perceived need for budget cuts. After all, the poor don’t have political clout. I think this analysis is probably correct. So, the stategy all along, from the very beginning of the Social Security program during FDR’s administration, was to argue that the program is a defined benefit pension program in which everybody must participate, rich and poor alike. That way, when Repubs say they need to cut benefits, the relatively comfortable old geezers will fight like hell to keep getting their $1200/mth.”

    Yep, well stated. But there is nothing wrong with making everyone to participate in some things. maybe a quibble about the amount is needed but making participation in a plan to provide income and medical support for elderly mandatory helps change people minds. It is a form of social engineering , which is good. I think our kids are different in their views about elderly and their needs because they were raised in an environment where some level of support was never questioned. That wasnt the case prior to the 1930s

    “It is one of the biggest political ironies of all time that it is the Dems who have pushed for and sustained one of the most regressive taxes of the modern era, all done to protect a social safety net that they hold dear. I say one of the biggest ironies only because most Dem social policies are like this. They have unintended consequences which tend to hurt the people that they claim to want to help.”

    Well I wont aggravate my carpal tunnel trying to point out the unintended (or maybe intended) consequences of many Repub social policies, but much of the unintended consequences are simply political pushback by the forces opposing the policies. So they are not really unintended, everyone expects some pushback in political arenas, but its very hard to anticipate all the many ways (even completely dysfunctional and incongruent ways……. *think the Tea Party and their “keep your govt hands off my medicare” signs* ) which your opponents will stoop to fighting.

    So I would argue its not the Dem policies which end up hurting the people they claim to help but the effectiveness of those opposed to the policies in keeping them form being implemented as designed. Of course that is true about any policy form any side.

    hoonose Reply:

    @ESM,

    “Buffett argues that many middle-class people are unfairly burdened with payroll taxes for Social Security and Medicare, calling it the “most regressive” tax. They only apply to income under a cutoff just above $100,000 but generate $800 billion a year, one-third of U.S. revenue.

    He rejected Joe Kernen’s suggestion that payroll taxes should not be part of the debate because they’re for an insurance system. With a laugh, he said, “Believe me, it’s a tax on income.”"

    Sounds about right to me.

    Reply

    ESM Reply:

    @hoonose,

    I’m sorry. Did you have something you wanted to add?

    Hoonose Reply:

    @hoonose,

    Sorry, my goof!

    @Jeff Burek,

    Ed Rombach Reply:

    @ESM,

    “Historically, it has been the Democrats who deny that the payroll tax is a tax. The reason is that once the public recognizes that it is a tax, which is largely disconnected from the benefits which flow in the future, the benefits will be turned off for the rich, soon thereafter the affluent, and then, within a few decades, it will become just another welfare program which will be squeezed for funding.”

    Exactly. Social Security is a welfare program and it should be recognized as such. Moreover, it should be means tested and the cap on income to which the SS tax applies should be eliminated altogether. However, the rate should be cut to 5% for employees and 5% for employers.

    Reply

  9. Erik Jochem Says:

    the fact that China discussed QE in connection with currency misalignments in my eyes relates to the fact that money from QE 1 went into speculation on the brasilian currency. That hurt brasilian exports.

    Reply

    WARREN MOSLER Reply:

    that speculation would have happened with or without qe.
    it wasn’t ‘that money’ that ‘went’ anywhere.

    the speculation was due to the desire of speculators to speculate.
    there is never a shortage of funds for that, just a price of funds

    Reply

    Erik Jochem Reply:

    @WARREN MOSLER, so what we have is a coincidence in time of QE and a sensible increase in speculation against brasilian currency. What you say is that speculation would have started at the same moment and with the same intensity without QE. Yours is a hypothesis that can’t be proven, the other side probably takes chronology as a poof for causation or at least as an indication that QE incited speculation.

    Your argument turned into a general statement would mean that the liquidty added to the financial sector by QE doesn’t have any impact on investment decisions of the financial sector even though this kind of liqidity may be cheaper than other ways of funding and comes without prior planing by the investor ?

    Where I can follow you is that sound investment decisions shouldn’t depend on QE liquidity. But can you exclude herd effects initiated by QE ?

    Reply

    WARREN MOSLER Reply:

    I didn’t say QE didn’t ‘trigger’ speculation. In fact, I said, in general, that all QE did was trigger speculation/portfolio shifts.

    What I do say is that bank liquidity is already, for all practical purposes, infinite, and therefore ‘adding more’ does nothing for spending/investment capabilities.

  10. Alicia Says:

    John Boehner is going to turn the deficit ceiling into another political side-show.

    Fox News is already starting to roll out the anti-Obama, lets be irresponsible and not raise the debt ceiling, propaganda machine.

    Who are these American’s that are so ignorant as to elect John Boehner?

    I swear 90% of Americans blindly pull either the Democrat or Republican lever based on some social group they perceive themselves belonging to, all to the detriment of themselves and to the advantage of the corporate – political ruling class.

    Reply

    Vincent Reply:

    @Alicia,
    You’re right. Why doesn’t Boehner just give Obama a blank check to write to his friends as Solyndra, or maybe to the Rodon group, since he visited them in PA today (instead of being productive in DC). President Obama has been working very hard at deficit reduction–check out what the centers for medicare are involved in now, just as one example. He wants a political showdown so he can reduce it a little more, even though the potential extra revenue actually represents a drop in the bucket. Based on historical precedent, Boehner is much more open to deficits than Obama.

    Reply

  11. Erik Jochem Says:

    so let’s say – in your words – that QE triggered a speculation shift towards brasilian currency. Sounds like a good reason to link QE to export losses in the brasilian view.

    True enough QE didn’t cause speculation as such and QE wasn’t a neccessary condition for speculation against Brasilian currency. But it’s sufficient in order to have a point against QE to say that QE altered the way in which speculation was done and that this harmed Brasilian exports. And this seems to be the political stance of Brazil and perhaps China.

    Reply

    Neil Wilson Reply:

    @Erik Jochem,

    If it harmed Brazilian exports, then that is down to the Brazilian central bank failing to act to prevent that.

    A central bank can always reduce or maintain the value of its currency by simply lots of another one with new money – as the Swiss have demonstrated.

    So trying to hang it on QE is a bit desperate. You need to blame the neo-liberal hangups of the Brazilian Central Bank.

    Reply

    MamMoTh Reply:

    @Neil Wilson,

    No, a CB can reduce the value of its currency if the other CBs let it, otherwise it leads to an inflationary currency war

    Reply

    Neil Wilson Reply:

    @MamMoTh,

    You should read the post and context before cracking off a reply. The key words you are looking for are ‘or maintain’.

    One central bank buys currency and sticks it in a hole, and the other central bank does the same. The result is a stalemate.

    The central banks do talk to each other. And they key point is that between them they can crush speculation in the currency pair if they want to.

    MamMoTh Reply:

    don’t worry, I read the post and the context.
    that’s why I said that a CB can reduce the value of its currency if the other CBs let it, otherwise it leads to an inflationary currency war.
    CBs talk to each other to avoid currency wars.

    WARREN MOSLER Reply:

    I think it might be a non inflationary currency war?

    Neil Wilson Reply:

    @MamMoTh,

    “CBs talk to each other to avoid currency wars.”

    And excessive speculation.

    Net exporters want a lower currency from their point of view, and net importers don’t want sudden change. That’s a common purpose where both sides have infinite capacity in their own direction. That makes excessive speculation a losing bet.

    No idea where the inflationary spiral is coming from unless you are using ‘inflation’ in the Austrian sense.

    MamMoTh Reply:

    @MamMoTh,

    What happens if the Bank of Brazil offers to buy dollars in the market at 2 Reais,
    and the Fed offers to buy Reais in he market at 1.8 Reais per dollar?

    What happens is that both CBs will pump money into the economy (without achieving their goals), and at some point it will become inflationary.

    WARREN MOSLER Reply:

    they ‘pump money’to each other, right?

    MamMoTh Reply:

    @MamMoTh,

    no, they pump money into the fx markets since their objective is to affect the exchange rates.

    and the fx market participants have the opportunity to make money for free, buying from one CB and selling to the other.
    in other words, it’d be nonsense.

    bottom line is, no CB can devalue unilaterally if it is not allowed to by the others (or it must impose very strict capital controls).

    Neil Wilson Reply:

    @MamMoTh,

    “bottom line is, no CB can devalue unilaterally if it is not allowed to by the others”

    And therefore neither can the speculators.

    Sergei_new Reply:

    @MamMoTh,

    Neil: And therefore neither can the speculators.

    Soros & BoE.

    MamMoTh Reply:

    with a free floating exchange rate, the exchange rate is always set by “speculators”

    Neil Wilson Reply:

    “Soros & BoE.”

    More Soros and the Bundesbank & BoE.

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