The increased liberalization of world trade has increased the scope of international division of labor and permanently helped raise growth in the world as a whole and in particular in third world countries. Particularly if trade is freed even more, this factor should continue to help the world economy to prosper. Another reason for the increased growth in emerging economies is the free market reforms implemented there with a country like China transforming itself from one of the most destructive communist systems in the history of mankind (that is saying a lot) to a virtual “capitalist paradise” with a seemingly endless supply of cheap but competent labor and with no welfare state and no unions and with many other emerging economies also undertaking free market reforms of varying radicalism. FULL ARTICLE
Source link: http://archive.mises.org/3533/the-future-of-the-world-economy/
The Future of the World Economy
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I am, and will continue to be, extremely optimistic about the way things are going in the world.
Thanks for the evidence that this isn’t mere hope.
Private sector debt doesn’t have anything to do with interest rates and monetary policy. This generation – my kids – have never seen one day of hard times and have never missed a single meal. It is now normal practice to buy toys on credit and for the lending institutions to encourage buying toys on credit.
Hi Bill: I’m not sure I follow your comment “Private sector debt doesn’t have anything to do with interest rates and monetary policy”, or how it connects with the comments that follow it. Are you saying that these three: private sector debt, interest rates, and monetary policy are not at all inter-related? My thinking is that they are intimately related.
Monetary policy dictates the availability of lendable money, which strongly influences interest rates. Interest rates, controlled in this way, influence both people’s propensity to save and to borrow. Therefore, with the presently incredibly low interest rates we have today, people tend to, for instance remortgage their homes and spend the proceeds. Concurrently, those who are not increasing their borrowing are at least not induced to save because the interest rates are so low. The existence of credit cards or that our generation eats well doesn’t seem to me to alter the analysis.
Thank you Stefan for a great article.
I am encouraged to chip in my own analysis of the state of my homeland, Canada.
Taxes and regulation are worse than the USA but better than Europe. Moves toward lower corporate taxes are being offset by heavier taxes to support socialized medical care (in the most populous province of Ontario a heavy “health premium” tax has recently been imposed). Implementation of the Kyoto Accord will mean extra tax and regulatory burdens on industries and households. The welfare state is expanding – for example the federal government is introducing a national subsidized daycare program. The political system has sunk into a miasm of corruption, which is the inevitable result of a government seizing control of so much of a nation’s economy. The provincial and municipal governments are crying with greater and greater shrillness for the federal government to give them more money to fund their own welfare systems and various pork-barrel “infrastructure” projects.
Demographically, Canada also suffers from a disasterously low birth rate, but this is offset by a rate of immigration which is by far the highest in the world. I am skeptical as to whether much benefit will accrue from all this immigration, since an increasing percentage of the immigrants are the sick and the old (attracted by the free medicare), and also because they are hardly landing in a free-market zone where their labour and investments can be used for the benefit of themselves and the greater economy.
I find the whole spectrum of industry in Canada to be weak and dependent on government subsidies and protection. Even the natural resources sector has gobbled huge amounts of government “assistance” to bring online various energy projects, diamond mines, etc. The manufacturing sector seems to be in permanent decline as companies such as GM Canada and Bombardier cry louder and louder for more government aid, and Nortel feels the need to put the ex-Finance Minister of Canada on its board of directors. The largest remaining steel producer seems to be spending a lot of money here in the nation’s capital lobbying for more cash because, “our strength is people” (i.e., pay up or the voters in Steeltown get it!) It’s hard to see how anyone will be able to establish new and successful businesses when so many corporate welfare queens have their hands in the public purse.
The current boom in Canada is driven partly by cheap credit, and partly by the resource boom as Canadian raw materials are sold for high prices to the USA, China and Japan. Canada also has a disasterously low personal savings rate. No other country in the world is as dependent on exports to the USA. As Stefan pointed out on this blog a little while ago, Canada has a trade surplus with the USA but a trade deficit with the rest of the world. Therefore no other nation is more vulnerable than Canada to a severe recession in the USA.
In the event of a 1930s-style depression, it is possible that Canada won’t survive as a federation. The population is a lot more ethnically and politically heterogeneous than in my grandparents’ time. It is more and more common for tensions over the more intrusive federal government policies to result in a segment of the population starting up the cry for secession. A Yugoslavian-style piecemeal breakup could occur in the event of a severe economic crisis (without the protracted civil war). Obviously the federal government would try to prevent this by slathering generous amounts of welfare onto the hot spots, but this might only escalate the tensions between the net payers into the federation and the net payees.
My only hope is for a nationwide recognition of the value of free markets to take hold in the citizenry, and a rejection of the welfare state. Perhaps these reforms could be introduced gradually into “free market zones”, the way they brought to China in the 1980s and 90s. Failing that, and if there is no breakup, the alternative is an economically comatose oligarchic/kleptocratic welfare state based primarily on state-sponsored exploitation and tax farming of Canada’s natural resources – like Russia, but with greater tolerance of foreign investment.
Thanks to Dr. Karlsson for this interesting article. The emergence of capitalism in China and SE Asia is important, encouraging, and almost astonishing. The integration of literally hundreds of millions of people around the world–Asia, Eastern Europe, Russia, India–into the world division of labor is a huge new source of wealth creation that will help make life easier for Americans.
Unfortunately, I suspect we’ll need all the help we can get. This last recession, which unfolded as the Fed kept the pedal to the metal, was the first in which consumer spending on durable goods did not slow, much less contract. The most obvious evidence of distortion is the Great Housing Boom, in which real estate has replaced stocks as the one-way wealth escalator to the skies. Living in a town of about 70,000 smack in the middle of an agricultural area, one sees a dramatic increase in new, expensive, large homes in the area over the past 20 years. In fact, so many new homes have been built that the prices of old housing in town are falling. This boom in McMansions has occurred during a time when both the population and incomes are actually falling due to drought and low grain prices! Mortgage debt in the US doubled from 2000 thru 2004! This is as glaring a departure from reality as was the rise of internet sand castles in the Ninties.
However, the Nobel Prize in Malinvestment ought to be awarded to the vast, exponentially growing universe of financial derivatives. The dollar value of this artifical life form dwarfs the real estate boom and threatens banks and financial institutions with ruin if the “impossible”–an “unplanned” monetary contraction–ever rolls across the country. In fact, the explosion in derivatives and the tepid rise in the CPI probably flow from common causes: the financial deregulation that has been on-going since the late seventies, and the liklihood that the “subsistence fund” in the United States is contracting.
Financial deregulation made the innovation of new products, all designed to expedite leveraged speculation, a new profitable industry that fed and flourished on the creation of new money. In the meantime, signs that the “real pool of funding” might be in decline emerged with the coincidence of falling saving rates, a rising current account deficit, steadily expanding credit creation, and an economic boom thru the Ninties that was in most respects weak and substandard. Because the subsistence fund has probably been declining, business profits and business investment have both fallen well below the average of previous expansions–a largely unremarked trend that continues thru today according to extensive research of Dr. Kurt Richenbacher.
As Dr. Frank Shostak explains it, the real pool of funding or subsistence fund is the accumulation of consumer goods used to sustain production and provide for the maintenance and expansion of producer goods. When the pool contracts in response to classic statist depredations–big government spending and regulation, big money creation and widespread malinvestment, low interest rates and low savings rates–businesses that had been profitable for years struggle to stay in the black because capital replacement costs increase.
Against the backdrop of a sluggish sputtering boom, entrepreneuers and speculators soom learned where the money was to be made. Instead of struggling for anemic returns by building plant, equipment and industrial infastructure to produce goods, smart entrepreneurs concentrated on creating and using new financial products for the purpose of doing what contemporary Americans do best: leveraged speculation. This produced the Great Stock Market Boom that has morphed into the Great Land Rush, accompanied by geometrically expanding malinvestment in derivatives.
Consumer price inflation has been tepid, in contrast to roaring financial and realty price inflation, because the mass of consumers struggle to make ends meet. Sure, they can all borrow money to buy cars, houses, and consumer goods, but they can’t save because they need to make the car payment. The declining subsistence fund shows up today in falling real wage rates and struggling indebted consumers who literally can’t afford to pay more for cars, airplane tickets, or shingles to fix the roof. Meanwhile, a robust financial and real estate sector directs rivers of new money toward the enrichment of a small sector of the economy, and these gainers buy expensive stuff with enthusiasm. But a large portion of Middle America is financially strapped in terms of income versus debt obligations, just getting by from paycheck to paycheck.
This might explain why monetary inflation has gunned investment prices while leaving consumer prices more or less in the dust. If the pool of funding is shrinking, then teetering real estate and stock prices imperil the huge world of derivatives and the institutions that have bet their net worth many times over on derivative prosperity. Deteriorting economic realities will eventually show up in vanishing profits,bad loans, and falling investment prices that could topple financial dominoes and contract the money supply.
I agree, Karlsson’s article is great, as they always are!
In it, Karlsson discusses the potential impact of a yuan revaluation as follows:
“A revaluation of the yuan would be one good way for China to reduce its dependence on exports to America. While it would create some negative short-term effects in the form of reduced exports and reduced value of assets in America, it would also lower the cost of imports. And most importantly, China would both lessen the risk of protectionist measures as the charge of “manipulating” its currency (as if there are any currencies today that aren’t manipulated) would go away and it would also reduce the damage caused by the protectionist measures as the higher dollar value of the economy of China created by the revaluation would lower the relative importance of exports to America.”
This makes sense, but I’m curious if Karlsson would further agree that China’s central bank’s pegging the yuan to the USD has been the cause of several other lingering problems it suffers from still.
Firstly the inflation incurred to print yuan to keep up with the USD inflation exported to China hurts Chinese savers. Furthermore, it contributes greatly to the fragile nature of the Chinese banking system by creating an overabundance of credit combined with government/corporate favoritism leading to so many bad loans. Also, the peg to the USD creates a harmful government subsidy to the Chinese export industries that impinges on industries and consumers relying more on imports (Karlsson does allude to this). The peg has kept the Chinese consumer from enjoying cheaper and better imports, and therefore a well deserved higher standard of living. Finally, pegging the yuan to the USD has caused china’s central bank to collect more and more of these dollars and dollar based securities paying low returns and which are bound to continue to depreciate as the US continues to inflate to prop up its economy while it executes its expensive wars.
Well. That was a mouthful. Any thoughts?
That’s our country in a nutshell, Mr. Ohhh Henry. It’s a good thing our parliament is so paralysed right now, denied the opportunity to do even more damage.
resonding to paul
a stronger currency can be a curse. japan and germany have, i believe, the largest trade surpluses. they also have relatively low statdards of living. their strong currencies don’t buy much for the average citizen. even with an 80% reduction in home prices, few japanese can afford to buy a home. germany is not only expensive, but last time i looked, it had a 10% unemployment rate.
the u.s., britain and austrailia, on the other hand, have massive trade deficits (u.s and britain, especially). yet, unemployment in these countries is low and living standards are high. i do not believe that this is a sustainable situation, but it certainly has had a good run.
Paul, I think the currency peg in China has helped boost its growth rate during the past few years by helping to promote trade.
However, the price of keeping the peg now is clearly higher than the benefits.
The main reason is the one I mentioned in the article, namely that it will likely provoce tariffs and quotas. We can already see a very strong momentum in Congress for the bill proposed by Democratic Senators Schumer and Clinton of New York, which would impose a 27,5% tariff on all Chinese imports, unless the value of the yuan is greatly increased. Most likely nearly all Democrats and many Republicans will support it, meaning it will likely pass in the Senate. And probably in the House too.
This means Chinese export growth will be sharply reduced anyway and in that case it is clearly preferable if it is made through a dearer currency, since this unlike tariffs means lower import costs.
Second reason why the peg is bad for the Chinese is that in order to maintain it they have to accumulate vast amount of dollar assets. During the latest year alone, the Chinese foreign exchange reserves have increased roughly $220 billion or 50% to $660 billion. The high likelyhood of a yuan revaluation has meant a hugh inflow of speculative capital, which the Chinese central bank has been forced to compensate by buying hugh amounts of dollar assets.
Interestingly, it is not even certain that a freely floating yuan would really rise that much. The reason is that in that case the speculative capital flowing into China might leave the country along with the savings of ordinary Chinese who want better places to invest their money than Chinese banks. China’s current account surplus isn’t really that large and even the inflow of FDI might not be able to compensate the likely hugh financial outflows. A freely floating yuan would be extremely volatile, but not necessarily rising.
because the chinese have pegged the yuan to the dollar, they will be damaged on two fronts if the u.s. raises interest rates. there is the either/or scenario, where if china indexes it’s interest rates to those of the u.s., its exports will become more expensive. or if it does not raise its rates, much of the world’s investment capital, that now flows into china, will find its way into the u.s.in order to take advantage of the higher rate of return. either way, china’s vast holdings of american long term notes will lose 15% of their value for every 1% the u.s. rates increase.
Stefan: Thank-you for responding! I always appreciate your articles and comments.
Would you say that there is an Austrian argument that export subsidies, on the whole, can ever be good for any country, including China, even though they would indeed boost the growth rate in its export industries?
Or in other words, putting aside your correct observations regarding retaliatory US tariffs, can we argue that a government intervention such as an export subsidy through currency pegs can ever be beneficial overall, to any country whatsoever?
My thinking is that the overall costs of government subsidies are always higher than the benefits, not only just when retaliatory tariffs are in the wind, and despite the benefit to the export industries.
Your point about the uncertainty of what a freely floating Yuan would do is a very interesting one. In the unlikely event that China were to pursue even freer markets than they have done to date, with a more fundamental respect for private property, I suppose only then could we reasonably feel assured of a strongly rising Yuan. (As an aside, i just heard that the cost of being a convicted Christian minister in China is several years in jail. If that is so, I guess Jefferson hasn’t arrived in China just yet.)
Thank-you again!
Since the French Revolution no economic experiment in the West has prevented the transfer of assets from the working people to the “old money,” our owners. We don’t know who these people are. Gates and Buffet have paper profits. They don’t control hard assets – real estate and the means of production. They can’t cash out because this would destroy the pyramid – transferring more assets to the old money.
Paul Edwards-Thank you for your kind words about my articles and comments.
As for your question-no I basically do not believe that export subsidies or any other kind of subsidies can benefit the economy.
There is a conceivable scenario in which it can-namely if there is a entrepreneurial underestimation of the opportunities in the export sector and if the government bureacrats identifies this then it might be beneficial. But that is such a unlikely scenario that for all practical purposes we can say that export subsidies can never be beneficial from a utilitarian perspective.
But what I was trying to say, but wasn’t sufficiently explicit about is that I do not regard the Chinese peg as a export subsidy.
Fixed exchange rate are no more of a “manipulation” than floating exchange rates. In some ways a fixed exchange rate in fact resembles the free market ideal more than a floating exchange rate. Under a international gold standard -the free market monetary system-”exchange rates” to the extent they would exist would be fixed.
Floating exchange rates and the exchange rate instability they create will create insecurity which will inhibit the growth of trade.
Of course this is not to say that *given*`the existence of national fiat currencies pegs are a lesser evil than floats. In fact I believe that in most cases fixed exchange rates between national fiat currencies are a greater evil than floating exchange rates because not only of the potential of Schumner-Clinton tariffs but also because the amount of money a central bank needs to spend to defend the peg (Either on selling the foreign reserves when the currency markets speculate it is too high as in the case of for example the British pound and Swedish Krona in 1992 or by expanding the foreign exchange reserves when the currency markets speculate it is too low as in the case of the Chinese yuan and Malaysian ringgit today) often gets so high that they outweigh all the advantages in the form of lower short-term exchange rate volatility.
I follow you, and I agree that the exchange stability provided by a true international gold-coin standard would be ideal.
Also, if the yuan did not tend to float upwardly if left alone, then I agree with you that the pegging is no subsidy to exports (and arguably, effectively no peg at all?). And i recall you suggesting that possibility. But if, as is sometimes suggested, the pegging of the yuan, in fact, is preventing the yuan from floating upwardly, would you then agree that the peg confers an advantage to the export industry, and therefore a subsidy?
Of course, there could be other interventions that i am overlooking that counter this affect, assuming my thinking above is indeed correct at all.
Thanks!
But i get your point: the boosting of China’s trade you are referring to, obtained by the peg is not due to the element of subsidy, but rather the element of exchange stability. That’s a perspective that I hadn’t given much attention to. I wonder if the Chinese central bank is thinking along those lines as well. I had always assumed they just wanted to subsidize exports.
Paul Edwards-You asked if the Chinese peg is a export subsidy if the yuan would rise in value if it were to adopt a floating exchange rate. The
answer to that is: Probably, but not necessarily.
As the divison of the world into national fiat currencies is a political phenonema,the yardstick according to which we should consider excahnge rates is not how they would be with floating exchange rates, but how they would be in a free market world. And since a free market world would most likely mean a international gold standard, we should compare current exchange rates against how they would have been under a international gold standard.
What that is exactly is of course impossible to tell in a fiat money world , but theoretically *if* the yuan is lower than its free market level then it would in effect be a combined export subsidy and import tariff. But if the exchange rate is higher than it would of course be a combined export tax and import subsidy.
I don’t really know whether the yuan according to this yardstick is undervalued or overvalued but my point is that is not necessarily undervalued just because it is pegged to the dollar or even
because it might have a lower value than if it were floating.
Remember that in a world with floating currencies a central bank can easily lower its exchange rate and thus in effect subsidize its exports and tax its imports through interest rate cuts. Lower interest rates will lower the exchange rate both by increasing domestic demand as the cost of booring falls and by causing capital flight in search of higher returns.
That has of course been the story of the U.S. Federal Reserve which has held down interest rates, which has created a strong downward pressure on the dollar. Through its low interest rate policy, the Fed has been the real exchange rate manipulator.
Arguably, the Asian central banks have only tried to counteract the exchange rate manipulation of the Fed. Again, because of the negative side-effects I don’t think they are doing the right thing, but I don’t think they should be considered being greater “currency manipulators” than the Fed.
As for the motive behind the Chinese peg, I think exchange rate stability is a important motive. During the Asian financial crisis in 1997-98 the yuan was actually attacked by speculators betting on a devaluation! But the Chinese held firm and refused to devalue
Thanks Stefan!
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