Martin Wolf, the senior economics editor of the Financial Times, Europe's main Englsih-language business paper, continues to peddle the notion that the huge financial imbalances in today's global economy (fundamentally, US debt-fuelled consumption driven deficits, and China's booming export surplus) were caused by the Asian countries' choice to focus on exports rather than domestic consumption, and that US deficits are only a consequence of that, rather than the other way round.
My take on the current imbalances is that corporations and their shareholders had hit what they thought was a wonderful virtous circle (for them):
- invest in China (or threaten to invest in China) to have lower wages - the Chinese ones, or those at home thanks to the threat of offshoring - and lower costs of compliance with health, safety and environmental regulations;
- export those low cost goods back home, where demand is kept brisk, despite stagnant wages, thanks to skyrocketing cheap debt and out-of-control government spending (the Bush-Greenspan corporate welfare double act);
- use the threat of China to meanwhile reduce regulations at home, as being a threat to competitivity, with the risk of negative investor sentiment;
- present skyrocketing profits (and the correspondingly high stock market values) as a sign of good economic health back at home, and lobby to lower the taxes that bear on them to unleash further "dynamism";
- as a bonus, take advantage of bubbling financial asset prices to become even richer.;
Unfortunately, cheap debt leads to empoverished consumers, and to poor investment decisions, and thus to bust (as in "boom and bust").
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That difference noted, let's go back to Martin Wolf: he wisely notices that US debt capacity has now reached its limits, and thus that these imbalances, which fuelled world growth in recent years, must unravel, thus threatening that growth. As growth is unconditionally a GOOD THING, it is now incumbent on Asians, starting with China, to keep it up:
The analytical point is that offsetting any slowdown in US demand requires faster growth of demand in the rest of the world.
(...)
What matters at such times is changes in demand relative to supply. From this point of view, China’s current mix is a disaster. Rebalancing towards stronger domestic demand and a smaller current account surplus has long been domestically desirable. In an era of weaker US demand, it has become a global necessity. China is about to have economic leadership thrust upon it. What happens now will depend heavily on how the Asian giant responds to this great challenge.
While, as stated above, I disagree on the origins of the imbalances, I agree that they are about to unravel, which means that the Chinese surplus will shrink, mechanically. The question is whether that happens via lower exports, or via increased domestic consumption. Or, put another way, will incomes increase in both the West and China (to keep demand buoyant on both sides) or will they not?
Somehow, I doubt that in a global slowdown, corporations and their pundit oncheerers will be visionary enough to choose the former...
We can expect a lot of fingerpointing towards China, but we should not forget that currently 50 to 70% of total Chinese exports are made by foreign owned companies. This is "offshore" in many ways: it's production by the West for the West, but using Chinese labor and Chinese regulations. China has decided that it benefits enough (in apparent development - despite the staggering pollution and other not-so-invisible environmental and social costs) to let it happen, but the damages to the world - to the global environment, and to the standards of living of the lwoer middle classes in the West, are not small - and the beneficiaries are just as obvious: the corporations and their shareholders.
Time to blame them rather than China.