Thursday, May 28, 2009

The Underlying Problems in World Trade

Regular readers will know that I am very cynical about the talk of recovery in the Western economies. I recently posted on the optimism for the US economy, and pointed out the many indicators that suggested that the economy is a long way from recovery. Similar arguments may be made for the UK economy. However, for this post, I thought I would return to the underlying nature of the economic situation, and there are a few factors that I would like to highlight.

The first of these is that the balance of trade, and current account balances of the UK and US are still in negative territory. Rather than detail the situation as it stands, I will try to illustrate the profound problem this represents through a gross simplification. I hope I will be forgiven this method.

If we were to imagine a world in which there were only two trading countries, that their trade was confined to two products, and that their trade was undertaken as barter, we can strip out the complexities of currency, and see the underlying problem. For the example, we will imagine that one country exports packs of pharmaceutical pills, and the other country toys. In country A, they manufacture 100 packs of pills per day, with 100 workers manufacturing 1 packet of pills each per day. In country B, they manufacture 100 toys per day, with 200 workers producing half a toy each per day. The workers in country B are willing to exchange 1 toy for 1 packet of pills in barter exchange. As such, the productivity of country A is twice that of country B, implying that country A is by far the wealthier country.

The problem that then arises is as follows; Country A is consuming 80 packets of pills per day, but also consumes 40 toys per day. Furthermore, Country A is saving nothing, whilst Country B is saving some. In the table below, it is possible to see how, after five years of this arrangement, Country A owes country B a whole years labour per worker. I make no pretense that these are real figures, but they serve to illustrate principles ( I hope the table is clear, as Blogger shrinks the images down, which is very annoying). As a note the exchange value is 1 toy for one pack of pills, such that each represents 1 unit of output.

What we are looking at in this table is a country B with large numbers of workers, with low productivity, but relatively small consumption levels and a high savings rate overall. I have put a separate column for savings in the table, but the debt owed by country A is (of course) representative of savings. The point in having a separate column is just to emphasise that the individual consumers in country B are very thrifty and cautious, and they therefore hold back from committing all of their stored wealth as credit to Country A. In other words they keep a store of toys (money) ready for exchange in the event of emergency. The model only shows the export trading part of the economy, and this store of toys is there for the exchange of goods and services, but still represents stored value.

The purpose of the table is to show what happens when one country over-consumes, and another under-consumes. Despite the high productivity of Country A, they are still in deep, deep trouble. By seeing the trade in terms of barter rather than currency, it is apparent that it is labour that is being exchanged.

Typically, what we see is such ideas hidden under mountains of economic theory, and obscured by many complicating factors. However, if we look at trade in these simple terms, it is possible to see how, in the end, one worker ends up owing another worker a huge amount of their labour. In this scenario, each Country A worker owes country B an entire years worth of labour. When considering this, it is necessary to also factor in to the equation that no individual is able to actually give a year of their labour to repay debt, so this labour must be repaid over time. As such, of course, the labour that is providing the credit in goods would (and does) demand interest for foregoing the consumption that they might achieve now for future consumption.

The table does not therefore fully express the severity of the situation for country A.

If we apply such a principle to the real world, thinking of the US (like Country A) and China (like Country B) as obvious examples, it is possible to see that something, somehow, absolutely has to 'give'. If we remove the complications of currency, it is possible to see that there is huge amount of labour owed by the US to China. It is also possible to see that China has the savings that will allow it to ride through the current downturn. For real current account balance figures, the US can be found here, and China here.

Inevitably, life is not as neat as the illustrative example, but the principles are what really underpin the nature of trade. It is the exchange of labour between two countries, not the exchange of money. Money is just an intermediary that represents the equivalent of toys and packets of pills.

If we think of the world in terms of this underlying exchange of labour, then it becomes clear that the previous current account deficits of the US has put the economy very, very deep in debt. If we then view the ongoing current account deficits, then we can see that the problem is just getting worse, albeit at a slower rate. The US is confronted with choices, none of which are very palatable. The first choice is to accept the reality of the debts, and therefore do what is absolutely necessary. This is to live in a frugal way until the labour owed to China is repaid. This means, in practical terms, a significant decline in living standards, with a massive decline in consumption, as more of the value of labour is switched to exports. For China, this means that they would not have to work so hard to achieve the same living standard, or they might still work as hard and have a far higher living standard.

After all, if the US starts to use its labour to repay debts, then the value of that labour will flow into China in the form of goods and services.

It is at this point, that life gets somewhat more complicated. It is the question of how this might be achieved.

The simplified model ignored currency in order to illustrate the underlying principles of what has taken place in the world economy. However, the reality of the world is that it does have a currency system. The underlying problem that the US must confront is that, at current valuation of the $US (albeit it has fallen back recently), it can not compete with Chinese labour in many sectors (thus the ongoing deficits). This is a very curious situation.

What we currently have is a belief that the ongoing deficits and the existing debt of owed labour do not matter when considering the value of the $US. It is the only explanation of why the $US might be valued in the way that it is. In part, this is a result of a false confidence in the productive capacity of US workers and the US economy as a whole. Another part of the problem is that China has a nasty choice. The only way that they might be repaid for the labour owed by the US is to accept that part of the existing debt of labour owed be wiped off the slate. I will try to explain this difficult concept...

When Chinese labour was exchanged for promissory notes from the US, there was a belief that the US would eventually exchange the labour for the full value of the notes. The problem arises that, if the US were to make this exchange on the original terms, then US labour would be unable to exchange their labour for the products of Chinese labour. Quite simply, they owe too much of their labour, and repayment would mean that they are living in relative poverty. In short, their consumption would fall back to a degree where they would by buying very, very few goods and services. The Chinese economy is largely centred around provision of their labour to provide goods and services to the US economy, and the halting of the consumption in the US would leave many companies without a market.

Now if we return to the table example, it is apparent that the Chinese are very productive, but consume very little. They are cautious consumers. In order for the situation to be rectified, they need to consume more of their own output. In other words they need to live more wealthy lives. The trouble is that, for cultural and systemic reasons, they are cautious, and would rather not use their acquired wealth for immediate consumption. If they were to consume more of their output, then they would be in a position of living relatively wealthy lives, and this would be further bolstered by the repayment of the labour owed to China by the US.

The problem then arises as to what will happen to all the factories that have, in effect, been lending the labour to the US? If the US economy collapses, then there is no market for their goods. If they demand that the US repays the debt of labour owed (on the original terms) the US will be very poor, and will be unable to afford to buy any of the products of Chinese labour.

The Chinese are now in an uncomfortable position. It is apparent that the US would struggle to have its workers repay debt, and this would be a political nightmare to enact. Nobody likes to move from apparent wealth to actual relative poverty. As such, instead of accepting the underlying reality that is represented in the current account deficits, both the US and China are doing the equivalent of sticking their fingers in their ears and singing 'la, la, la, la!' at the top of their voices.

The real problem, however, is what the US is doing to try to rectify the problem. It is apparent that US labour has been doing the same as the country A workers in the table. They have been consuming more than they produce, and now owe significant amounts of their labour to China. Now that they are confronted with repayment of their debts, they simply do not want to pay. Furthermore, they are demanding that their ability to consume more than their output is continued.

The US government, rather than telling them the hard reality that it is repayment time, is telling them that they can, in fact, continue to consume more than they produce. In order to allow this to happen, they are using several rather dishonest measures. The first of these is that they are attempting (and currently succeeding) in persuading many countries, organisations and people, that the US is in a position to one day repay the debt of labour owed, and that the US has sufficient future output to repay even more debt to the labour of others in the future. The curious part of this is that, up to this point in time, they have offered no explanation of how the US might actually achieve such (increasingly massive) debt repayments.

The second measure that they are enacting is the policy of printing money, and the eventual devaluation of the $US. This is a measure to allow the US to default on the debts of the past. In the table, the barter exchange rate is 1 toy = 1 packet of pills. However, in the real world currency is an intermediary, and devaluation of the currency is a way of post hoc arranging that 1 toy = something like 0.6 packets of pills. In other words, they are reneging on their debt, and breaking their promise to pay.

Whilst this may resolve past debts through dishonest means, it still leaves the US with an underlying problem. The apparent wealth that they have enjoyed is, in part, due to living on the labour of others. However, if they do not repay their past debts, that labour will be withdrawn (e.g. if they devalue their currency, China will no longer lend their labour). At the time that the labour is withdrawn, the US will find that it is reliant upon the output of its own labour, and that labour is insufficient to support the standard of living that was possible with the labour input of countries like China. They will find that they are very much poorer than they imagined, and that is a painful situation to confront.

Perhaps this is too simplistic. I would welcome comments on the situation, and how the underlying premise might be wrong.

Having said all of this, it might appear that I am painting China as an innocent party in the current problems. However, as I have emphasised in the past, China has manipulated its currency in a policy of mercantilism. In so doing they have systemically under priced the value of their labour, and used this to ensure positive trade balances. The cost of this has been borne by Chinese workers, whose purchasing power of imported goods has been diminished, and whose earnings have not properly reflected the market value of their labour. For example, by holding the value of the RMB at an artificially low level, the cost of imported goods has been held high, meaning that each worker is relatively poorer than they might otherwise be. This has also had the effect of overpricing US labour, such that it is not competitive.

The result of such a policy is that China has protected its domestic manufacturers in the home market, and subsidised their exports through underpricing their labour. In so doing, they are making an investment in the future of China, as the result of the underpricing is that they are able to compete unfairly, by undercutting US companies and putting them out of business. I remember reading an article in the Economist a long while ago that suggested that a country in receipt of subsidised goods should be grateful that they are able to consume the products at a discounted rate. However, the result of such subsidy is to destroy businesses that might otherwise compete with such products.

What we can now see in the relationship between China and the US is a very messy situation. The US owes a huge amount of labour to China, and is unable to pay this debt without a massive retrenchment in consumption. That the US is not facing up to debt, and is increasing debt, is a problem that will simply not go away. Whilst US consumers are now starting the painful process of debt repayment, the government is increasing its debt to attempt to maintain living standards in the US. However, in doing so, the overall debt in labour owed to other countries is still increasing. This despite the fact that the US is both unwilling and unable to service existing debts as their economy is currently structured.

Meanwhile, China continues to under price its labour, and therefore continues to undercut the labour of the US, such that it continues the process of hollowing out US capacity to ever repay the debt. In doing so, it drives the US ever further into a ditch.

Quite simply, when we remove the complications of currency, and think of the debts owed by one country to another in terms of labour owed, the madness of the current situation becomes apparent. It is also possible to see that the actions of governments are quite simply making a very bad situation worse, and that the final outcome - or denouement of the situation - will be ever more extreme.

Note 1: I hope that all of this makes sense. I showed the post to another person before publication to see whether there were any errors in my thinking, and the response was very positive. I am aware that many readers of this blog are very astute, so I will also look to you to identify any problems in my thinking. My concern is that, when expressed this way, the gravity of the situation becomes so profoundly obvious, that I simply must be missing something. I look forward to the comments.

Note 2: I have had some interesting links that are pointing to increasingly negative sentiment for the $US. The link provided by Don Keyes is a good summary of the situation. Is this the start of the $US collapse? Quite possibly...but I have predicted the collapse before and been wrong. Like any sane person, I do not want to see a $US collapse. However, set against this, better sooner than later....the longer the US government and Federal Reserve follow their mad policy, the greater the long term damage to the US and world economy.


  1. A few months ago I wrote a garbled comment which I don't think anyone understood. I pointed out that if there are 300 million US citizens and 1.3 billion Chinese, then the average person in China can only have less than a quarter of a US person 'working for' him, no matter how many dollars China has amassed. The use of money does, indeed, obscure the reality of the situation.

  2. Cynicus,

    Thanks for a fascinating insight.

    America and China strike me as the quintessential couple locked in a destructive relationship: habitual patterns, dependency issues, neither wanting to admit the relationship is fatally flawed, both parties putting on a brave face for the rest of society, neither side admitting their future together is doomed.

    I remember Jerry Seinfeld saying that getting out of a long-term relationship is like pushing over a refridgerator: you can't just push it over in one go - it's gonna get rocked a little from side to side first to gain some momentum - only then will it fall.

    I guess the America-China fridge has been rocking for some time now - wonder who is finally going to make it topple?


    PS, not sure how accurate these 'investors' are but this might be worth a look.

  3. On the US trade Deficits and Foreign-Owned Industries in China Part 1

    I think the issue of US trade deficits is complicated by US multinationals owning industries in China.

    The fact is that a significant amount of the goods being exported to the US from East Asia are made in foreign-owned (not domestically owned) enterprises:

    “Two-thirds of China's exports, for example, are made by foreign companies who essentially reprocess imports of semi-manufactured goods that are then shipped to Europe and the US.”Will Hutton, "Don't expect China to get the West out of this mess"
    The Observer, Sunday 26 October 2008

    In addition:

    “Since 2002 [US] corporate profits have doubled, matching their highest share of GDP ever in 2006 … Corporations report an 18- to 20-percent annual increase in their total global investments. That means that companies are investing more outside the United States and less here at home. And that, in turn, helps to explain why more than 40 percent of the imports into the United States, which totaled $1.8 trillion (or 13 percent of GDP) in 2006, weren't from "foreign competitors," but from U.S.-based corporations' facilities and contractors offshore.”Luria, Daniel, “Is manufacturing in the United States toast?” Manufacturing & Technology News, Oct 17, 2007

    You also fail to mention the scale of foreign owned industries in East Asia, and that fact that some of the profits they make in US and European markets must eventually be repatriated back to Western investors in manufacturing companies.

  4. On the US trade Deficits and Foreign-Owned Industries in China Part 2George J. Gilboy makes this point:

    “China's high-tech and industrial exports are dominated by foreign, not Chinese, firms. Second, Chinese industrial firms are deeply dependent on designs, critical components, and manufacturing equipment they import from the United States and other advanced industrialized democracies. Third, Chinese firms are taking few effective steps to absorb the technology they import and diffuse it throughout the local economy, making it unlikely that they will rapidly emerge as global industrial competitors.

    A close look at the breakdown of China's exports by type of producing firm puts China's economic rise in perspective. Foreign-funded enterprises (FFEs) accounted for 55 percent of China's exports last year [2006]. In this respect, China diverges from the typical Asian success story.

    ... the dominance of foreign firms in China is even more apparent in advanced industrial exports. ...

    The data ... highlight another trend that reinforces China's dependence on foreign investment and the growing gap between FFEs and domestic Chinese companies. In the 1990s, Beijing permitted a new FDI trend to develop: a shift away from joint ventures and toward wholly owned foreign enterprises (WOFEs). Today, WOFEs account for 65 percent of new FDI in China, and they dominate high-tech exports. But they are much less inclined to transfer technology to Chinese firms than are joint ventures. Unlike joint ventures, they are not contractually required to share knowledge with local partners. And they have strong incentives to protect their technology from both domestic and other foreign firms, in order to capture a greater share of China's domestic markets. As a result, according to the most recent Chinese government statistics for high-tech industries (pharmaceuticals, aircraft and aerospace, electronics, telecommunications, computers, and medical equipment), FFEs increased their total share of high-tech exports from 74 percent to 85 percent between 1998 and 2002. But perhaps more significant, in the same period, they increased their share of total domestic high-tech sales from 32 percent to 45 percent, while the share of that market held by China's most competitive industrial firms, SOEs, fell from 47 percent to 42 percent.
    George J. Gilboy, “The Myth Behind China's Miracle” Foreign Affairs, July/August 2004

    In light of this, is it not the case that US-based or EU-based corporations must have a large share of the ownership of manufacturing companies in China? That some of the profits from Chinese manufactored goods in the West must eventually flow to Western investors and corporations?

  5. Cynicus,
    a useful post explaining something that really should be blindingly obvious, but which to many people in the West is not obvious at all.
    Maybe the situation is only obvious to those who have either conducted business abroad or travelled extensively. Whatever, i have some intelligent friends whose 'antennae' never point outside the UK, and whose grasp of such issues would be about 0 on a scale of 1 to 5. Nor are they remotely interested.

    Lord Keynes,

    you have to hand it to those canny Chinese don't you.
    Knowing full well that the situation re exports is unsustainable, what do they do? They make it easy for Foreign Companies to invest in chinese manufacturing capacity - a much more canny solution than a Chinese company making the investment in a plant that may end up being a white elephant.
    Of course as a result China holds control of possibly the only profit centre in the exercise: it can 'rate' the buildings / infrastructure involved; it can levy income tax on the more skilled workers; and it could set a minimum wage to protect the less skilled.
    Meanwhile, the Foreign Company simply has to take the product to some market, such as the USA, and sell it for a profit.

    Prehaps its worth shouting the revevant bit - SELL IT FOR A PROFIT!

    Methinks Messrs Gilboy and Luria may have missed an important point.

    Once again, as a general point, i think it is worth stating that we cannot discuss such issues as this today, and extrapolate forward, without concidering the glass ceiling of limited resources - Peak Oil et al.

    There is no point 'everyone (in debtor nations) seeing the light' and rolling up their sleeves to make 'tangible stuff'.
    We would run slap bang into $200 or whatever oil and knock ourselves out.

    First we have to SLASH out energy consumption, only then might we be able to find firm ground on which to build something.

    Lets face it, i am guessing most of us have been reading this and similar blogs / websites for most of a year now.
    It must be obvious that not only are there no quick fixes (QE etc), but also that we (in the debted west) are functioning in an economic system that is - please excuse my language - utterly bolloxed.

    Farmer John

  6. Cynicus,

    I think you have made an error.

    I think the figure for "consumption of pills per worker per day" in country B should be -0.1, unless 20 units of pills are created from thin air.

    Also, 100 toys are produced. 40 are consumed by country A and 10 are consumed by country B. 10 are also saved by country B (they can't save pills because there is none left). Where do the other 40 toys go?

    You'll be glad to know that someone has actually looked at your very interesting table. I think that on the whole you are spot on except that I disagree that pills can always equal toys. I think this is an artificial constraint to make your table work. The "market" will always adjust the exchange rate between toys and pills to make it a zero sum game.

    However, I certainly agree that the exchange rate between America and China did not move to adjust for the trade balance, and caused the current crisis.



  7. Hmm

    what if the US know well they cant pay the bills and are running up as large bill as possible before doing a "runner" on the restaurant

    armed with nuclear weapons and spending more that all the other countries put together would china or anyone else risk mutual destruction that would surely be the result of a war?

    dunno just thinking loud here


  8. CE wrote:

    "The US government, rather than telling them the hard reality that it is repayment time, is telling them that they can, in fact, continue to consume more than they produce."

    Isn't this just indicative of the inherent problems of capitalism. Neo-liberalism was the answer to this in the 1970s. A response to the contradiction in capitalism where corporations need to make more profit so squeeze the workers, but then those same workers have less money to consume what's produced.

    Globalisation offered those same corporations the chance to maximise their profits by moving production to where it's cheapest and then letting us use credit to keep buying their stuff.

    I have often felt you have concentrated too much on the last 15 years and not on neo-liberalism more which started 15 years before that.

    To follow on from Lord Keynes' point, I work in IT and run a number of PC franchieses for the UK's largest distributor. Although all of the kit is made in China - HP, Dell, Toshiba, Samsung especially - it's all still owned by foreign firms. Asus and Acer are made in Taiwan. Fujitsu manufacturing is split between China and Germany. Only Lenovo of the major players is a Chinese owned business and 3 years after being bought from IBM is still an absolute basket case - the worst orgainsed company I have ever dealt with and they've made no headway in any Western market. That's just IT, I'm not sure about other sectors.

    I'd be interested in how the repatriation of these profits fits in with your thinking. How much benefit does China actually get - does the Balance of Trade really mean all that much if loads of cash is subsequently removed? You have attacked the uselessness of GDP as a measure of wealth before - is there more the BoP than meets the eye?

    How many of the worlds biggest 250 firms are Chinese owned for example?

    In a further twist as oil became more expensive last year Toshiba began movign more production to Poland and closer to their key market to reduce shipping costs. Might those kind of considerations also hit China at some point?

    Furthermore, although China seems in a strong position they must be worried about how relaxing the rate of the Renminbi and any opening up of their country to encourage more domestic consumption will encourage political demands, possible de-stabilisation and potential capital and industrial flight.

    How would Chinese BoP look if every IT company decided actually they'd prefer to put their manufacturing somwhere more stable?

    Sorry loads of questions. Fascinating post as ever!

  9. Lord Keynes has some valid points. China has only embraced partial market reforms for the past 30 years, while the US and UK have been free market leaders for centuries. Many technological innvoations are still Western, China is still playing catch up.

    The US can amend their deficits by consuming less, by accepting a lower living standard - this is the easiest option the one politicans don't want to accept and instead are trying to bankrupt the country. There are many productive areas of the US still intact - its just there seems to be an 'underclass' evolving there and in the UK who were previously employed in work that has since been outsourced.

    Its not just China hollowing out certain jobs. Brazil, Egypt, India, South Korea - the list could go on. The whole world is changing - and eveyone wants to embrace markets more than ever.

    Asia and Eastern Europe have thrown away their experiments with Communism, the middle eastern states are investing their petrodollars, latin america no longer have battles between the extreme right and left.

    We have a globe that is trying to converge on living standards and everything getting a lot more competitive out there. Many are embracing western ideals are sick of the old lennist-marxist-islamic propaganda and just want better living standards for themselves and their children.

    The China and US agreement will end very badly. It reminds me of the 1930's depression, with Britain and the US, and China will have a hard landing.

  10. Lord Keynes, Matt and Phill: I have given the current account balance, not the balance of trade figures for the US. The point of the current account is that it includes everything, including investment incomes. The current account is negative, as well as the balance of trade.

    "Current Account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). The balance of trade is typically the most important part of the current account."

    I suspect that there is an element in the thinking on multinationals that the West must be winning. It harks back perhaps to the idea of evil companies exploiting the poor world. China has embraced this 'exploitation'. Why?

    Lemming: A fair point, though productivity in the West still exceeds China to a degree (though less than in my example). One interesting point is what real productivity figures are, as they are measured between countries in $US, such that, with currency manipulations, they do not reflect real output.

    Tiberius: I like the Seinfeld analogy!

    Interesting link - I am not sure who they are either, but would agree with their overall point. I wrote a post asking whether the UK and US were the new Zimbabwe some while ago. I have had a link to an article since then which questions this, and might address this in a future post.

    Lord Keynes: A second point. If you read Will Hutton's 'China, the Writing on the Wall', you may find that you will be less likely to reference him. It is a mix of a few good insights with lots of padding of little value. His overall thesis just descends into a mindless discussion of 'enlightenment values', which appear to translate as his values.

    Acrobat: Thanks for the corrections! I felt there was something wrong, which is why I askes a friend to check it. However, I am glad that you can see that the underlying principles remain.

    The issue of the exchange value of goods is a difficult question, and one I have left out of this. I have fixed the exchange between toys and pills as a simplification.

    Farmer John: You are right that many people are oblivious to the problem. That is why the quick fixes are so easily accepted.

    If people were aware, would they choose to reduce consumption, or try to continue with their free lunch? I hope the former, but suspect the latter.

    Smiley: Another good analogy!

    Matt: You have made many interesting points. I have worked in China, and the management can be a little chaotic - at the moment. However, there is a broad answer to some of your points. China has accumulated a huge war chest of foreign reserves, has a massive sovereign wealth fund, and may simply 'shop' its way into the big leagues.

    Up to now, countries like the US have tried to block such shopping, but now that they need China's wealth/support???

    General: Sorry, quick responses! Thanks for some interesting points.

  11. Reply To Cynicus 1

    I think you fail to address my main point:

    Is it not the case that US-based or EU-based corporations must have a large share of the ownership of manufacturing companies in China (especially in high-tech)? That some of the profits from Chinese manufactored goods in the West must eventually flow to Western investors and corporations?

    In particular:

    “Since 2002 [US] corporate profits have doubled, matching their highest share of GDP ever in 2006 … Corporations report an 18- to 20-percent annual increase in their total global investments. That means that companies are investing more outside the United States and less here at home. And that, in turn, helps to explain why more than 40 percent of the imports into the United States, which totaled $1.8 trillion (or 13 percent of GDP) in 2006, weren't from "foreign competitors," but from U.S.-based corporations' facilities and contractors offshore.”
    Luria, Daniel, “Is manufacturing in the United States toast?” Manufacturing & Technology News, Oct 17, 2007

    I notice the EU is excluded from your analysis. Germany, despite some offshoring, is still an industrial powerhouse. The EU in general tends to have current account balance.

    The point is that you can't produce anything without bringing back manufacturing to the US. That means government policies to force corporations to shift their production back to the US.

    An example:

    "US corporations, which have moved their production for US markets offshore ..., can be provided with a different set of incentives that encourage the corporations to bring employment back to the US. For example, the corporate income tax can be restructured to tax corporations according to the value-added in the US. The higher the value-added in the US, the lower the tax rate; the lower the value-added, the higher the tax rate.

  12. @Lord Keynes and others

    Are you saying that China is basically a 'service economy'?

  13. Another comment from the Telegraph on the bond market's response to the issue of T-bills:

    It really is looking like this may indeed be the day of reckoning...

  14. Steins law basically says 'that which cannot continue, won't'. The US/China economic dance may continue for a while but it is a fundamentally unstable situation for the reasons you have propounded and will eventually collapse.

    The US (and other Western economies) have had the Chinese working for them effectively for free, paying by giving them bits of paper promising payment of money (which is really labour) in the future. You can do this for so long, but eventually something has to give, if the debt is constantly growing, with no signs of when it will be repaid.

    We are reaching the limits of the current arrangement. How it will change is open to question - it could mutate organically, it could collapse catastrophically.

  15. @ CE

    Sorry, I think it came across that I was suggesting the Chinese were somehow rubbish administrators - that wasn't really the point and I have no evidence for a view either way.

    I'm much more interested in the fact that although all this manufacturing has happened there it's all still foreign owned and that, contrary to the expectations of a lot of us in the industry who expected Lenovo to be incredibly aggressive, they haven't been.

    It just seems odd that the only Chinese owned and run company has made no headway.

    You response partly answered mine as did Farmer John. Couldn't agree with the latter's point on oil more although I fear any leader who tries to lead on a reduction of consumption ticket will never win - just look at Obama's modest proposals being hammered in Congress.

    Easter Island here we come!

  16. Hello Farmer John
    have you read Michael Pollan's books or know about permaculture etc? He and others are quite convincing on immediate threats of an interruption to the food supply.

    Now the internet and MSM are ctaching up with cynicus and the other doomsayers, I am getting bored by it. And find more practical and positive courses of action worth pursuing.

    Would be interesting/useful to know your perspective on this. . .

  17. Hello Cynicus

    Very interesting and insightful

    However it strikes me that the operation of more than 2 parties must be to blame for some of the complexity. I presume that, like gravity, adding a 3rd player makes the system irreducably complex and naturally chaotic?

  18. Telegraph article about the American-Chinese relations and the potential geopolitical shift Eastwards as a result of the "financial crisis".

  19. Mark

    In your example about the two countries you characterise 'saving' as keeping a reserve of goods for use in the future, which you then equate with saved money. Am I stating the obvious if I say that saving money is different from saving real goods?

    When people save money they are only storing a claim on future goods and services, not storing something tangible. Most of the goods and services which people are paid for are ephemeral anyway, holding very little value beyond the here and now.

    Isn't the value of money which is exchanged for these items and then saved, based purely on a bargain of trust that it will be honoured in the future by people who, in turn, wish their money to be redeemable further in the future? The saved money is usually not put under a mattress, but is 'invested' in business enterprises. However, there is no guarantee that these will bear fruit in the long term.

    The value of the saved money is only claimable in the future against the state of the economy then, not as it is now. Everything is OK if the economy is perpetually expanding, but if a country with its own currency kills off all its industry through mal-investment, for example, it cannot then expect to sit back and live off its 'savings' as they are only pieces of paper which the rest of the world will perceive as worthless.

    It seems to me that savings only guarantee an individual's relative future wealth against his neighbours, not the absolute level of wealth of the country, because the world will not 'redeem' a country's savings based on its past economic performance, only its present one.

    There must be some merit to having a high 'savings ratio' in terms of maintaining a healthy level of investment in the economy, but it is not the same as actually storing up something that that can be drawn upon in times of economic downturn.

    (Or I may just be spouting complete rubbish!)

  20. Willem Buiter is very pessimistic about the British economy.



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