By Michael Baxter 11 Mar 2010 [1 Comment | 476 views]
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Barack Obama wants to see US exports double within five years. Later today he is due to make a speech outlining how he is going to do this.
And yet last month, China saw exports jump 46 per cent on the year before.
And that, in a nutshell, is the great imponderable. Obama has this idea to save America. But how can that be possible?
Meanwhile, China’s bubble is inflating faster than ever. In China, house prices are soaring and inflation is rocketing.
Obama’s dream and China’s pipeline of troubles are two sides of the same coin. Or would it be more accurate to say Obama’s pipedream and China’s bubble nightmare are two sides of the same coin.
Meanwhile, a top man at the world’s largest mutual fund has sounded a warning on sovereign debt. He reckons that markets have not grasped the seriousness of the problem.
The big imponderable is that just about every nation in the world wants to recover by promoting exports and creating a trade surplus.
This is as nonsensical as saying every premiership football team expects to win all their matches this season.
And yet Uncle Sam’s budget deficit is growing faster than a balloon being pumped with copious volumes of helium. February saw US government receipts fall no less than $221 billion below expenditure.
The cumulative deficit for the current financial year so far, which began in October, is $651 billion, and the US government reckons it will top $1.5 trillion this year.
Now you see why this column has argued that those who say the UK is in a worse mess than its rivals have missed the point. Our rivals are in a dreadful mess too. But at least the UK, thanks to the cheap pound, is one of the few countries that can realistically expect to export its way out of trouble.
But given the size of the US deficit, the UK deficit, the German deficit, the French deficit, not to mention the crises in the PIIGS, and, oh yes, Japan’s budget deficit which dwarfs the others, you can see why some predictions that we may have a burgeoning sovereign debt crisis on our hands, do understate the truth a tad.
Mohamed A. El-Erian, a big cheese at Pacific Investment Management, the world’s largest mutual fund, is worried. In an interview with the FT he said: “The importance of the shock to public finances in advanced economies is not yet sufficiently appreciated and understood.” He added that the crisis is “at present being viewed primarily – and excessively – through the narrow prism of Greece.”
So the question, then, is not will the UK go bust, rather it is will the world go bust?
Of course that too is nonsensical. For every debtor there must be a creditor. Setting aside arguments about climate change, and how our species may be bankrupting Mother Earth, the planet can’t go bust. Not in a monetary sense. For that to happen, we would have to owe money to another planet. And although there might be a great investment bank in the sky called Lehman, economics doesn’t allow for metaphysical debt either. No, there are no banks on Mars, or Alpha Centauri, therefore the world can’t go bust.
Then again, maybe some parts of the world are in it over their heads to other parts of the world. So that means the Japanese government is in debt to Japanese citizens. But the big creditor is, of course, China.
So it is tempting to conclude that the inevitable result of the sovereign debt crisis will ultimately mean a massive transfer of wealth from the developed world to China.
Uncle Sam won’t like that, which is why there is a real danger that things could get nasty in the decades ahead.
And yet China’s economic model is just as unsustainable.
China simply can not continue exporting. An annual growth rate of 46 per cent can not continue. China knows this, which is why she is pumping government money into the economy. But then we see asset prices escalate. In China, house prices rose 10.7 per cent in February, from a year ago, in the country’s 70 largest cities. Or so says official stats. The FT quoted Gu Yunchang, Secretary-General of the China Real Estate Association, as estimating that, actually, house prices in China were up 22 per cent in February on a year ago.
Now, it may be worth putting in some context here. Since China’s growth rate is around 10 per cent, the surge in house prices may not be quite as bad as it seems. Even so, few deny China is in the midst of a property bubble.
In China, inflation is rising fast. The annual rate of consumer price inflation hit 2.7 per cent in February. Okay, the inflation rate in the UK is higher, but there are fewer factors pushing downwards in China. The risk that inflation will take off is much greater in China than in the UK.
Besides, as we know now, an asset bubble can be the forerunner of something quite nasty.
The real issue for China is that productivity is rising at this incredible pace. It is expected that the average Chinese will produce around $4,000 worth of goods and services this year, compared to $3,500 last year. When productivity is rising that fast, demand has to rise equally fast or you get unemployment. It is inevitable that when demand rises at that pace, imbalances will occur. Some parts of the economy will grow too fast, other parts too slowly; when at the same time parts of the economy are starved of the necessary funds, bubbles are inevitable.
The point is, China has got its own problems. It is far from clear that China will be the ultimate winner for the West’s debts.
That is why it is the great imponderable, and why this column goes on about innovation as being the only sustainable way out of trouble.
By the way, if you want to read a summary of Investment and Business News’ stance on the economy, click here
For more on China, the yuan versus dollar, and sino versus western culture see:
The Great Bubble of China
China and the West: the lesson of history
Truth or myth, free trading yuan is answer to our ills
Will the emergence of China mean more unemployment in the West?
Why China’s real opportunity gets overlooked: the parallel with Japan
What went wrong with China and what went right?
China and the West – The difference is cultural
China in our hands and the currency row
China solves economic crisis, with cunning plan
China heading for recession, and the yuan myth
The great imponderable
China: the government is not omnipotent – it is impotent; and that’s where the West has got it wrong
‘The narrow prism of Greece’ will highlight & expand the perception of sovereign debt. The EU are just now cobbling together a ‘billions of dollars’ aid package for Greece, which thay ‘expect’ that Greece will not need, and the Greek Govt to date has not taken up.
Why put together a package that you do not expect to be used ? When you first practise to deceive, what a tangled web you weave ( Old Bill W )
The UK taxpayer will not make any contribution to this aid package for Greece. Germany will pick up the major part of the bill. Watch that go down like a lead balloon with the German electorate & taxpayers.