Then there’s China. The latest body to have a go at China and its exchange rate currency is the OECD. But not so fast, the National Institute of Economic and Social Research released its quarterly economic review yesterday, and it made a good point about China. Talk is that China’s exchange rate policy is what is really wrong with the world. But, here is another Chinese related whisper. Maybe, if the economy behind the Great Wall was to let its currency ride the stormy currency market waters things wouldn’t be that different after all.  

The OECD has also waded into the China spending.

As you know, the Chinese government has opened up the vaults and spent. Some say this is just not sustainable. Maybe they are right, but the OECD wants to see China’s government keep the spending up.

It reckons that it is now time for the Chinese government to spend money on education, health, pensions and welfare assistance.

The big problem facing a Chinese worker is fear.  They are terrified of what will happen should they lose their job. Desperation, of course, creates desperate measures.  Classical economic theory says you should never have unemployment. It says that a short-term rise in unemployment will lead to lower wages, so employers will start taking on staff again. In short, in a free market, the price of labour clears the market, demand equals supply.

There are two problems with this theory. Firstly, as Keynes pointed out 70 years ago, a fall in employment will lead to a fall in spending, which in turn could lead to another fall in employment.  Sure, in the long run the market may clear, but how long do we have to wait for this long-run position. That’s why Keynes famously said: “The long run is a misleading guide to current affairs, in the long run we are all dead.”

The second problem relates to what happens if people lose their job and are simply incapable of getting a new one. For example, ill health makes them unemployable.

Chinese workers respond to the fear of job loss through saving more. That rainy day really is a terrifying prospect.

Now some say, it’s a bit rich when the West, with its irresponsible attitude to debt,  lectures the Chinese on saving too much. But be under no doubt, if it wasn’t for irresponsible Westerns with their spending the Chinese growth story would have never got started. An economy can grow via exports, meaning someone else is importing more, or by consumer spending, meaning saving is low.  There is no third way.

So, actually the OECD is right. Up to a point.

That brings us to the yuan. China fears that if it’s currency start to appreciate, exports will fall and Chinese growth will stutter and maybe come to a halt. The OECD is saying that if China combines higher spending on social services with a rising yuan, the Chinese consumer will take up the slack and growth can continue, even if export growth slows.

There are snags, however. On a per capita basis, China remains a poor country. So while an increase in welfare spending may seem like a good idea, for as long as GDP per capita is so much lower than in the developed world, it is possible to exaggerate the extent to which this is possible. 

And never forget, when the US was a developing economy, the gold standard effectively fixed the value of currencies, and the dollar relative to sterling was exceedingly cheap.

It is also open to debate whether the yuan would actually rise that much if China opened itself to the markets. For while on one hand exports should drive the yuan up, if China was to really open itself up, savings might flow out of the country. It is far from clear how the dynamics of the flow of money would work out.

And finally, even if the yuan did appreciate, it may not make much difference to the West. As the National Institute of Economic and Social Research said yesterday: “The rest of Asia supplies over half of Chinese imports, with just 1 per cent of Chinese imports sourced from the UK and 7-8 per cent from the US.  As such, a rise in domestic demand in China has little impact on exports from these countries.”