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The End of China’s Surplus by Martin Feldstein - Project Syndicate SIGN IN
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alexferro 07:45 28 Jan 11
Be careful what you wish for is interesting!!!!!!!!!!!
bluebear 04:34 29 Jan 11
Future concerns should not focus only to the disappearing of a major bond buyer to fund US deficit.
If Chinese government, instead of buying US Treasury’s bonds, returned all current-account surplus money back to its people, Chinese people would either invest domestically to revalue the RMB against the USD or to import more goods to create jobs and more tax revenue for the US.
Further, a faster increase of Chinese’s living standard, gained by government not amassing their export-earned money, would faster lower China’s cheap-labor comparative advantage and that will further lower US Treasury’s need to sell bonds to fund federal deficit. When the jobs outsourced to China came back to the US organically they would improve US employment tax revenue and reduce transfer payments.
Professor Feldstein’s model, ”The saving-investment imbalance is fundamental, and it alone [regardless of distortions in foreign exchange rates] determines a country’s external position” are not applicable in this case because national saving in China has two parts: private people’s, and government’s.
The majority of Chinese people is still very poor and has no access to establish external investment positions.
By distorting foreign exchange rate while holding a monopoly market-maker’s position, the government of China taxed its people too severely to suppress the rate of improvement of living standard well below the rate of growth of real earning gained by exports.
dsorenson 09:16 30 Jan 11
Mr. Feldstein, I’ll respond below to your arguments, paragraph by paragraph. Feel free to counter, I’d love the challenge.
Feldstein: China’s current-account surplus – the combination of its trade surplus and its net income from foreign investments – is the largest in the world. With a trade surplus of $190 billion and the income from its nearly $3 trillion portfolio of foreign assets, China’s external surplus stands at $316 billion, or 6.1% of annual GDP.
Sorenson: Yes, those key facts are not in dispute. However, trade policies you espouse, support, and more than likely helped devise gave them that surplus. Why was this done? In my humble opinion, exploitation of Chinese lower health care cost, lower wages, lower environmental regulatory cost, multi-national profit, destruction of U.S. Unions, reduction in taxable revenue requiring increased public debt, and supposedly fighting inflation to name a few.
Feldstein: Because the current-account surplus is denominated in foreign currencies, China must use these funds to invest abroad, primarily by purchasing government bonds issued by the United States and European countries. As a result, interest rates in those countries are lower than they would otherwise be.
Sorenson: Again your facts are impeccable, but who said Depression level interest rates are desirable? Your focus is clearly on the cost side of interest rates. What about the income side of interest? Economists in your camp have used the U.S. lack of savings as justification for the exploitative purposes stated above. The fraud of the lack of U.S. Savings argument is clear. Again, economists in your camp manipulated savings dynamics by reducing interest rates and manipulating real estate and stock market prices with cheap – easy money policies in order to move money from insured bank accounts to uninsured real estate and equity investments in the stock market in order to pull off “The Big Short.” Take a look at a graph generated by IMF data and an article written by me on “The Big Short” on Newsvine at the following locations: http://twitpic.com/30xqi0/full http://bit.ly/The-Big-Short
Feldstein: That may all be about to change. The policies that China will adopt as part of its new five-year plan will shrink its trade and current-account surpluses. It is possible that, before the end of the decade, China’s current-account surplus will move into deficit, as the country imports more than it exports and spends its foreign-investment income on imports rather than on foreign securities. If that happens, China will no longer be a net buyer of US and other foreign bonds, putting upward pressure on interest rates in those countries.
Sorenson: They key word is in the first sentence, it is the word may. So you’re saying some lucky group of countries will enjoy what we gave them? I would prefer moving from Depression era rates and would love to earn a decent rate in an insured bank account and not be forced by lack of any other options to put at risk my retirement savings so that the criminality of Wall Street can feast upon it. I’ll defend the criminality claim by referring you to any number of writings by the respected – honest fighter for the rule of law for all William K. Black.
Feldstein: Although this scenario might now seem implausible, it is actually quite likely to occur. After all, the policies that China will implement in the next few years target the country’s enormous saving rate – the cause of its large current-account surplus.
Sorenson: They save, yes indeed they save. But, I’ll rebut your claim by saying economists need to make a living too and they like a bigger paycheck if possible. That check is made possible by dogmatic obedience and allegiance to policies that benefit the Money Dictatorship. A subset of that dictatorship is depicted in the following graph of IMF trade data and screenshot of Goldman Sachs BRIC investment fund: http://twitpic.com/3ujpbf/full We realize economist’s need to eat too, but when they sacrifice their integrity and good name to enrich their masters with corrupt, flawed, self-serving economic arguments, they do nothing but destroy the profession they so proudly purport to belong to.
The next section of paragraphs don’t need individual attention, so I will debate – discuss them at the end of the appropriate paragraph.
Feldstein: In any country, the current-account balance is the difference between national saving and national investment in plant and equipment, housing, and inventories. This key fact is not a matter of economic theory or an historic regularity. It is a fundamental national-income accounting identity that must hold for every country in every year. So any country that reduces its saving without cutting its investment will see its current-account surplus decline.
Feldstein: China’s national saving rate – including household saving and business saving – is now about 45% of its GDP, which is the highest rate in the world. But, looking ahead, the five-year plan will cause the saving rate to decline, as China seeks to increase consumer spending and therefore the standard of living of the average Chinese.
Feldstein: The plan calls for a shift to higher real wages so that household income will rise as a share of GDP. Moreover, state-owned enterprises will be required to pay out a larger portion of their earnings as dividends. And the government will increase its spending on consumption services like health care, education, and housing.
Feldstein: These policies are motivated by domestic considerations, as the Chinese government seeks to raise living standards more rapidly than the moderating growth rate of GDP. Their net effect will be to raise consumption as a share of GDP and to reduce the national saving rate. And with that lower saving rate will come a smaller current-account surplus.
Feldstein: Since China’s current-account surplus is now 6% of its GDP, if the saving rate declines from the current 45% to less than 39% – still higher than any other country – the surplus will become a deficit.
Feldstein: This outlook for the current-account balance does not depend on what happens to the renminbi’s exchange rate against other currencies. The saving-investment imbalance is fundamental, and it alone determines a country’s external position.
Sorenson: Yes that is true, but if other countries tire from running current account (CA) deficits and realize that China will adjust their currency manipulation scheme to prevent any outside currency adjustments from affecting the currency exchange rate, they will respond with import taxes on good coming from China directly or indirectly. If China’s exports are reduced by outside forces it will affect their CA balance. They are motivated by domestic concerns and when the time is right they will take care of their own, like we all will do. Eventually, when they have weakened their trading partner – potential enemies, they will shift toward domestic production - consumption and will let those countries who were duped into these criminal current account deficits to fend for themselves. I wouldn’t put it past them to embark upon a military offensive once they feel they have us where they want us, to tell you the truth.
Feldstein: But the fall in domestic saving is likely to cause the Chinese government to allow the renminbi to appreciate more rapidly. Higher domestic consumer spending would otherwise create inflationary pressures. Allowing the currency to appreciate will help to offset those pressures and restrain price growth.
Sorenson: That’s a big but, and we also know China has broken its currency promises more times than anyone cares to count. They have a lot of other measures they can take to suppress inflationary pressures, they do have a repressive side to them, do they not? In a country of more than a billion people, with their control of the media, who’s going to know if they eradicate some of that inflationary pressure? They do it all the time, do they not?
Feldstein: A stronger renminbi would reduce the import bill, including prices for oil and other production inputs, while making Chinese goods more expensive for foreign buyers and foreign goods more attractive to Chinese consumers. This would cause a shift from exports to production for the domestic market, thereby shrinking the trade surplus, in addition to curbing inflation.
Sorenson: Again, they are domestically motivated and already tax imports from the America. Are you trying to say they will be as corrupt with their population as we have been with ours and run their economic ship aground?
Feldstein: China’s trade surplus and the renminbi’s exchange rate were high on the list of topics that President Hu Jintao and US President Barack Obama discussed when Hu visited Washington earlier this month. The Americans are eager for China to reduce its surplus and allow its currency to appreciate more rapidly. But they should be careful what they wish for, because a lower surplus and a stronger renminbi imply a day when China is no longer a net buyer of US government bonds. The US should start planning for that day now.
Sorenson: So, now you’re saying we should worry about China worrying about China now? Now that the economists in your camp have gutted the U.S. Treasury, you’re telling us we should start worrying about having already given away the ranch? We should have been careful years ago. The arguments your economic camp espouse were made long ago and the result was the roaring twenties and “The Great Depression.” Unfortunately, time allows the collective intelligence to be manipulated into repeating destructive mistakes. Congratulations on a job well done, and spend it wisely. We’ll be working on measures to make your camps job of doing this again much more difficult, if not impossible. Thanks for the opportunity to debate. I hope you allow my comment to remain, but expect a delete button to be depressed, so I will screenshot my entire submission for posterity’s sake. Take care. J
dsorenson 09:16 30 Jan 11
Mr. Feldstein, I’ll respond below to your arguments, paragraph by paragraph. Feel free to counter, I’d love the challenge.
Feldstein: China’s current-account surplus – the combination of its trade surplus and its net income from foreign investments – is the largest in the world. With a trade surplus of $190 billion and the income from its nearly $3 trillion portfolio of foreign assets, China’s external surplus stands at $316 billion, or 6.1% of annual GDP.
Sorenson: Yes, those key facts are not in dispute. However, trade policies you espouse, support, and more than likely helped devise gave them that surplus. Why was this done? In my humble opinion, exploitation of Chinese lower health care cost, lower wages, lower environmental regulatory cost, multi-national profit, destruction of U.S. Unions, reduction in taxable revenue requiring increased public debt, and supposedly fighting inflation to name a few.
Feldstein: Because the current-account surplus is denominated in foreign currencies, China must use these funds to invest abroad, primarily by purchasing government bonds issued by the United States and European countries. As a result, interest rates in those countries are lower than they would otherwise be.
Sorenson: Again your facts are impeccable, but who said Depression level interest rates are desirable? Your focus is clearly on the cost side of interest rates. What about the income side of interest? Economists in your camp have used the U.S. lack of savings as justification for the exploitative purposes stated above. The fraud of the lack of U.S. Savings argument is clear. Again, economists in your camp manipulated savings dynamics by reducing interest rates and manipulating real estate and stock market prices with cheap – easy money policies in order to move money from insured bank accounts to uninsured real estate and equity investments in the stock market in order to pull off “The Big Short.” Take a look at a graph generated by IMF data and an article written by me on “The Big Short” on Newsvine at the following locations: http://twitpic.com/30xqi0/full http://bit.ly/The-Big-Short
Feldstein: That may all be about to change. The policies that China will adopt as part of its new five-year plan will shrink its trade and current-account surpluses. It is possible that, before the end of the decade, China’s current-account surplus will move into deficit, as the country imports more than it exports and spends its foreign-investment income on imports rather than on foreign securities. If that happens, China will no longer be a net buyer of US and other foreign bonds, putting upward pressure on interest rates in those countries.
Sorenson: They key word is in the first sentence, it is the word may. So you’re saying some lucky group of countries will enjoy what we gave them? I would prefer moving from Depression era rates and would love to earn a decent rate in an insured bank account and not be forced by lack of any other options to put at risk my retirement savings so that the criminality of Wall Street can feast upon it. I’ll defend the criminality claim by referring you to any number of writings by the respected – honest fighter for the rule of law for all William K. Black.
Feldstein: Although this scenario might now seem implausible, it is actually quite likely to occur. After all, the policies that China will implement in the next few years target the country’s enormous saving rate – the cause of its large current-account surplus.
Sorenson: They save, yes indeed they save. But, I’ll rebut your claim by saying economists need to make a living too and they like a bigger paycheck if possible. That check is made possible by dogmatic obedience and allegiance to policies that benefit the Money Dictatorship. A subset of that dictatorship is depicted in the following graph of IMF trade data and screenshot of Goldman Sachs BRIC investment fund: http://twitpic.com/3ujpbf/full We realize economist’s need to eat too, but when they sacrifice their integrity and good name to enrich their masters with corrupt, flawed, self-serving economic arguments, they do nothing but destroy the profession they so proudly purport to belong to.
The next section of paragraphs don’t need individual attention, so I will debate – discuss them at the end of the appropriate paragraph.
Feldstein: In any country, the current-account balance is the difference between national saving and national investment in plant and equipment, housing, and inventories. This key fact is not a matter of economic theory or an historic regularity. It is a fundamental national-income accounting identity that must hold for every country in every year. So any country that reduces its saving without cutting its investment will see its current-account surplus decline.
Feldstein: China’s national saving rate – including household saving and business saving – is now about 45% of its GDP, which is the highest rate in the world. But, looking ahead, the five-year plan will cause the saving rate to decline, as China seeks to increase consumer spending and therefore the standard of living of the average Chinese.
Feldstein: The plan calls for a shift to higher real wages so that household income will rise as a share of GDP. Moreover, state-owned enterprises will be required to pay out a larger portion of their earnings as dividends. And the government will increase its spending on consumption services like health care, education, and housing.
Feldstein: These policies are motivated by domestic considerations, as the Chinese government seeks to raise living standards more rapidly than the moderating growth rate of GDP. Their net effect will be to raise consumption as a share of GDP and to reduce the national saving rate. And with that lower saving rate will come a smaller current-account surplus.
Feldstein: Since China’s current-account surplus is now 6% of its GDP, if the saving rate declines from the current 45% to less than 39% – still higher than any other country – the surplus will become a deficit.
Feldstein: This outlook for the current-account balance does not depend on what happens to the renminbi’s exchange rate against other currencies. The saving-investment imbalance is fundamental, and it alone determines a country’s external position.
Sorenson: Yes that is true, but if other countries tire from running current account (CA) deficits and realize that China will adjust their currency manipulation scheme to prevent any outside currency adjustments from affecting the currency exchange rate, they will respond with import taxes on good coming from China directly or indirectly. If China’s exports are reduced by outside forces it will affect their CA balance. They are motivated by domestic concerns and when the time is right they will take care of their own, like we all will do. Eventually, when they have weakened their trading partner – potential enemies, they will shift toward domestic production - consumption and will let those countries who were duped into these criminal current account deficits to fend for themselves. I wouldn’t put it past them to embark upon a military offensive once they feel they have us where they want us, to tell you the truth.
Feldstein: But the fall in domestic saving is likely to cause the Chinese government to allow the renminbi to appreciate more rapidly. Higher domestic consumer spending would otherwise create inflationary pressures. Allowing the currency to appreciate will help to offset those pressures and restrain price growth.
Sorenson: That’s a big but, and we also know China has broken its currency promises more times than anyone cares to count. They have a lot of other measures they can take to suppress inflationary pressures, they do have a repressive side to them, do they not? In a country of more than a billion people, with their control of the media, who’s going to know if they eradicate some of that inflationary pressure? They do it all the time, do they not?
Feldstein: A stronger renminbi would reduce the import bill, including prices for oil and other production inputs, while making Chinese goods more expensive for foreign buyers and foreign goods more attractive to Chinese consumers. This would cause a shift from exports to production for the domestic market, thereby shrinking the trade surplus, in addition to curbing inflation.
Sorenson: Again, they are domestically motivated and already tax imports from the America. Are you trying to say they will be as corrupt with their population as we have been with ours and run their economic ship aground?
Feldstein: China’s trade surplus and the renminbi’s exchange rate were high on the list of topics that President Hu Jintao and US President Barack Obama discussed when Hu visited Washington earlier this month. The Americans are eager for China to reduce its surplus and allow its currency to appreciate more rapidly. But they should be careful what they wish for, because a lower surplus and a stronger renminbi imply a day when China is no longer a net buyer of US government bonds. The US should start planning for that day now.
Sorenson: So, now you’re saying we should worry about China worrying about China now? Now that the economists in your camp have gutted the U.S. Treasury, you’re telling us we should start worrying about having already given away the ranch? We should have been careful years ago. The arguments your economic camp espouse were made long ago and the result was the roaring twenties and “The Great Depression.” Unfortunately, time allows the collective intelligence to be manipulated into repeating destructive mistakes. Congratulations on a job well done, and spend it wisely. We’ll be working on measures to make your camps job of doing this again much more difficult, if not impossible. Thanks for the opportunity to debate. I hope you allow my comment to remain, but expect a delete button to be depressed, so I will screenshot my entire submission for posterity’s sake. Take care. J
AUTHOR INFO
Martin Feldstein Martin Feldstein, Professor of Economics at Harvard, was Chairman of President Ronald Reagan's Council of Economic Advisers, and is former President of the National Bureau for Economic Research. MOST READ MOST RECOMMENDED MOST COMMENTED Did the Poor Cause the Crisis? Simon Johnson New Year’s Hope against Hope Joseph E. Stiglitz Global Risk and Reward in 2011 Nouriel Roubini Why is Rape Different? Naomi Wolf New Rules for the Global Economy Dani Rodrik A New World Architecture George Soros No Time for a Trade War Joseph E. Stiglitz Avatar and Empire Naomi Wolf America’s Political Class Struggle Jeffrey D. Sachs Did the Poor Cause the Crisis? Simon Johnson Did the Poor Cause the Crisis? Simon Johnson Life after Capitalism Robert Skidelsky The End of China’s Surplus Martin Feldstein A People’s Economics Robert J. Shiller Intelligent Economic Design J. Bradford DeLong ADVERTISEMENT PROJECT SYNDICATE Project Syndicate: the world's pre-eminent source of original op-ed commentaries. A unique collaboration of distinguished opinion makers from every corner of the globe, Project Syndicate provides incisive perspectives on our changing world by those who are shaping its politics, economics, science, and culture. Exclusive, trenchant, unparalleled in scope and depth: Project Syndicate is truly A World of Ideas.
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