interesting debate on stability of current global economic system (bretton woods ii)

dominic

Beast of Burden
i suppose no one who reads this board understands economics -- i certainly don't

even so, what i found most striking in this debate is the fantiastic notion that the "center" (the u.s.) might continue to live off the backs of the world's poor ad infinitum -- i.e., once china is fully developed and has absorbed all excess agricultural labor into industrial jobs, such that china has a more highly valued currency, more expensive goods, an internal consumer market, less money to lend to u.s., etc, then the u.s. will simply turn to the next periphery for cheap goods, perhaps india, perhaps indonesia, perhaps africa

remember -- in exchange for cheap goods made by impoverished chinese workers, the u.s. pays to china paper dollars -- the center lives off the backs of poor laborers in the periphery, quite literally

is this the meaning of "empire" today??? = run a trade deficit that you'll never be able to make good on w/ country A, and then when country A is up to par, shift to consuming the goods of country B for free, and then country C for free?

here's the relevant passage --

Michael Dooley of Deutsch Bank said:
I am pleased that you brought up the "no landing" idea. We have argued that the current Asian bloc has about 10 years to absorb its excess labor and graduate from the periphery. When that is accomplished, their exchange rates will no longer be undervalued and current-account balances will return to normal levels. There will be some real dollar depreciation to service a larger stock of U.S. debt but most of the adjustment will come from rising interest rates in the U.S. and other industrial countries. We are in the soft-landing camp . . . .

It's also a mystery to us where you and others got the idea that we believe that governments that are now managing their exchange rates will finance the level of U.S. deficits that you forecast. Rather, the savings that they would send out will decline as development proceeds as described in the above reference. We have argued that it would be a natural development for the system if another periphery, seeing that this was a successful development strategy, takes their place. So yes, the system lasts for a very long time, but the China part of it gradually fades.

What will last for the foreseeable future is the U.S. role as the center country in the system. In some periods this will generate large net inflows of savings from the periphery to the U.S.; in other periods, none at all or reversals. Clearly there was no effective periphery for 20 years after the demise of Bretton Woods I, and the U.S. built a net asset position in international markets. When a new periphery emerges, we will have to carefully evaluate the incentives and constraints faced by the system at that time.
 
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captain easychord

Guest
to be honest man i'm really feeling all this stuff you link, i just wish i could understand what they were talking about bettter, like i get the overall conclusions but the actual economic reasonings goes right over my head. keep em coming though.
 

DigitalDjigit

Honky Tonk Woman
captain easychord said:
like i get the overall conclusions but the actual economic reasonings goes right over my head. keep em coming though.

let me take a crack at explaining it:

China is trying to modernize and the way to do it is to build factories that make stuff. Obviously they then need to sell the stuff so they set their exchange rate to help exports. They keep the exchange rate of the yuan low relative to the dollar because that means that for Americans it's cheaper to buy from China than at home ($1 goes a longer way in China than in US because it buys a lot of yuan). So after the Chinese firms sell their goods they get left with a lot of dollars as payment for them. The Chinese central bank exchanges these dollars for yuan for them. Now the Chinese central bank has all these dollars, they can't just have them sitting there so what they do is buy US government bonds (financing the US government deficit). Since they keep the demand for US bonds high that means US bonds do not have to offer a high interest rate to attract buyers so this percolates down through the economy resulting in historically low interest rates for consumers.

I guess the question is why don't the Chinese central bank invest the money back in their economy? Here's a quote from the article: "Emerging economies are financing the U.S. because their central banks want to finance the U.S.; private investors are quite willing to finance the emerging world."

Eventually as the Chinese economy gets big enough they will no longer need to export goods to America to grow, they will be able to sell them at home. At that point a new country to take China's role will be needed. That is because once China stabilizes the profit opportunities will diminish so capital will need to find a new place where they could be getting 10% annual growth rates. I think these growth rates come from poor countries because developed countries are no longer interested in making basic consumer goods like textiles so those production facilities move to countries where wages are low enough where such production is profitable and therefore they experience rapid growth. In developed countries growth comes from high-technology, in developing countries it comes from taking over production of lower technology goods from developed countries.

I think that is the orthodox view more or less. Of course the game does not have to be set up that way but that seems to be the way it is operating right now.

This is a great article, thanks Dominic.
 
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captain easychord

Guest
you're big, that makes it much easier to dig into, thanks man.
 
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