A thought to ponder Anyone?

[Billy T]

...China is taking proactive steps. They are building many MANY nuclear power stations and they are investing a lot of money into cleaner wind power in the Gobi Desert.
Instead of denying China's rise, I think it would be good to see China rise. It's only a matter of time before they must accept democracy, as their middle class grows and demands the freedoms that other industrialized countries have.

That is why I bet India will dominate in the end, but unfortunately, the population of China is not anxious for "democracy." - Especially as their propaganda machine controls their image of what "democracy" is. I.e. Shows its evils, like bums freezing to death on NYC streets, Saudi Royal family and military dictatorships, like Pakistan, being supported as the "democracy" US is developing in the Middle East, etc. These are the image of democracy the masses in China are feed daily and they are contrasted with the "great Chinese progress" which is leaving the west behind (even in "human rights," like everyone eating daily, all kids getting health care and schooling, etc.)

China is very corrupt, but hard working, with everyone trying to advance materially, and by and large, most are happy with their government protecting them (and their children) from the “smut on the internet,” etc. It is more of a western idea that material progress will force real democracy than a fact of human nature.

Human nature tends to be reflected more by the population of Germany in WWII, I fear. I.e. so long as you individually have your life getting better (VolksWagen = the "people's car") you can easily look away if some other (possibly sub-human) group is suffering. During WWII, the "Japs" were also portrayed as "sub-human" by the US government. Many were rounded up and placed in concentration camps, even the mothers of sons serving in the US army in some cases! Their business were destroyed etc. and compensation paid only to a few, more than 50 years later. US selling democracy to Iraq is also doomed - they want peace and security, the cheap gas back, a dependable supply of water and electricity, etc. not democracy. - Putin put it well recently when Bush was publicly chiding him about the need to promote democracy in Rusia. Putin said, "Like US is doing in Iraq?"

Perhaps in the very distant future, economic stagnation will overcome the Chinese government telling the population how “lucky they are to be living in China,” not exploited by heartless capitalists, freezing and sick on some NYC street, etc. but that is a very distant future.

Machiavelli must be smiling from ear to ear, if he is looking down on modern China. Surely Gobbles is.

Anyway, I am glad at least someone else can see that there is at least a little gray on the US horizon.

BTW, China is adding a new power plant every 8 days! 30 new nuclear ones in next two years. - US has not even ordered one in 30 years!

 

[swivel]

You have my psychology all wrong......

Great post!


Edit: Except the JFK mention. One of our worst presidents by far. An ultra-conservative worshiped by all liberals for some odd reason. (because he was cute, perhaps?)

 

[terryoh]

Billy T, I understand, but I'm a firm believer that free market capitalism will, in the long run, lead to more individualism. Individualism will lead towards democracy. We don't see any of this now, because China's capitalist economy is still very young (what, 30 years now?).

I'm fairly certain that in two decades, the people will be demanding more freedoms that they should have. Civil unrest is probably the biggest fear of the Communist Chinese government right now, probably even more than their fear of the US military.

It will be a slow and ugly process, and will have it's ups and downs. But every young democracy goes through growth pains. But in the long run, it will be best for China, because it will put them on top in the world.

BTW, for those who mentioned how Japan hasn't overtaken the US. Yeah, but look at the Japanese population (a third of the US), history of industrialization (starting from the late 1800s to early 1900s), and land size (probably 1/30th of the US) and compare that to the US (3 times the population of Japan, 50 years of industrialization more than Japan, and much much larger land mass). Japan did a lot more with limited resources than the US has with it's resources. In fact, I think Japan overachieved.

On the other hand, China is basically equivalent to the US in terms of land mass, it has 5 times the population, and it's industrialization occurred in the last 30 years. That's like 100 years less time of industrialization than the US. And yet, it's only a few trillion dollars off of the US GDP. That large population has slowed down the progress of China, but it will, in the long run, aid it. As mentioned before, this generation's Chinese factory laborers will give birth to the next generation's educated professionals (lawyers, doctors, engineers, researchers, programmers, scientists, etc...), so China will need a new batch of factory laborers. Well, look no further than the 900 million other Chinese who are itching to work in those factories.

China's long run export growth will be sustained for, indeed, a long time. In addition, they will also be expanding their services sector. Things are definitely looking up for China. You can quote all the environmental, pollution-related, etc... stats all you want, but the fact is that all industrialized nations go through that. It's not only just China. England went through it, America went through it, France went through it, etc... .

 

[swivel]

China's long run export growth will be sustained for, indeed, a long time. In addition, they will also be expanding their services sector. Things are definitely looking up for China. You can quote all the environmental, pollution-related, etc... stats all you want, but the fact is that all industrialized nations go through that. It's not only just China. England went through it, America went through it, France went through it, etc... .

So, China will end up just like England, America, France, etc... Right? I mean, if they pull off all the miracles that Billy T foretells on this site, China will one day be a magical place that everyone wants to go to for unspoiled riches. So they will have an immigration problem, right? They will have class unrest, right? They will have rampant consumerism and a shrinking middle-class, right?

This is what I don't get about the jeremiads, they pretend that the rapid initial growth of developing countries will somehow continue indefinitely. That these economies and political systems won't have to deal with the same exact problems that plague all developed countries. It makes no sense.

China was a backwards country. As soon as it decided to join the world market, it began a meteoric rise towards the very lowest level of developed countries. People mistakenly think that rate of rise will continue, but it won't. And a lot of the numbers thrown around are only exaggerated due to the high population. You could just as easily combine the numbers of the EU and India, and make the same claims. The fact that all of these people are in the same country means nothing. Countries do not trade with one another, people trade with one another.

 

[dixonmassey]

Strangely, as more and more people among so-called middle class in the West consider modern western democracies as the nearly meaningless theater of absurd played by the elites on the dumbed down electorate, chinese soon well to do burgers will be eager to install such a system. That's questionable.

The problem, I think, is in the definition of the middle class. Being able to consume certain amount of goods and services is one definition of the middle class. That's only relatively recently hired hands could afford consumption rates of bourgeoisie. Ironically, a person making $25k on shop's floor is a middle class too One must separate bourgeoisie class per se and "middle class" to understand driving forces behind "democracies". It's unfortunate but if "middle class" is well fed, it could not care less about politics. At the same time bourgeoisie class is constantly engaged in the division of a pie regardless of cash flow.

 

[terryoh]

So, China will end up just like England, America, France, etc... Right? I mean, if they pull off all the miracles that Billy T foretells on this site, China will one day be a magical place that everyone wants to go to for unspoiled riches.

IMHO, Billy T did embellish it a bit too much, but the structure of what he was saying is true.

But yes, in the long run (maybe even in our lifetime), China will end up like America, England, etc... are. Of course, China will be on the top of the food chain for a while (to be ousted by another country again), but they will go through the same things that young democracies in America and England went through.

About the unspoiled riches part, American and European companies are already doing it now. It's not as if China is going to become a magical place in the future. To the corporations, China already is that place.

So they will have an immigration problem, right?

If China goes to the top and is the most prosperous place on earth, sure. I can foresee South East Asians and Central Asians flocking to China for job opportunities.

They will have class unrest, right?

They already do.

They will have rampant consumerism and a shrinking middle-class, right?

No. China's middle class is small already. It will grow even more. The majority of their country is still below the poverty line. 900 million Chinese still aren't "middle class" yet.

This is what I don't get about the jeremiads, they pretend that the rapid initial growth of developing countries will somehow continue indefinitely. That these economies and political systems won't have to deal with the same exact problems that plague all developed countries. It makes no sense.

China will go through the same problems. No one is denying that. I just find it pathetic that people can't realize that China won't be a developed country and, in the long run, a democracy due to it's capitalism and slow-growing individualistic tendencies.

China was a backwards country. As soon as it decided to join the world market, it began a meteoric rise towards the very lowest level of developed countries. People mistakenly think that rate of rise will continue, but it won't.

Sounds kind of like what people though of America in the 1800s. America wasn't always rich and prosperous. It made a meteoric rise once it industrialized and never looked back. People mistakenly think that America will always be on top, but it won't. It took China a long time to industrialize (beginning after the death of Mao), but they took that first step. The next step is to continually foster growth, and then to adopt democracy for it's people.

And a lot of the numbers thrown around are only exaggerated due to the high population. You could just as easily combine the numbers of the EU and India, and make the same claims. The fact that all of these people are in the same country means nothing. Countries do not trade with one another, people trade with one another.

Yes, but fiscal and monetary policy are within borders though.

I sense a feeling that people want to deny the fact that China is rising so fast and is achieving in 30 years what it took America over a 100 years to do. It doesn't matter though. You have your opinions and I have mine. As I've stated before, I'm sure the British Empire felt that it's former colony (America) would never rise above it, but look what ended up happening? The Romans thought the backwards Germanic tribes would never rise above it, but look what ended up happening? The Arab nations felt that the newly formed Israel wouldn't be able last, especially after a united invasion, but look what ended up happening (militarily and economically)?

The writing is on the wall, in my opinion. No one should fear China. It's people will eventually realize that democracy is the proper path, not communism. The people will then demand democracy, the government will cave in, and we'll all be living in peace.

 

[Billy T]

...To the corporations, China already is that place....

Here are numbers (2006 totals) for you on this:
DFI into China was 1.4 trillion dollars (converted from the Yuan actually invested to dollars at 7.8Y/$)
This is a 24% increase over the 2005 DFI!

Also the revised rate of growth for 2006 of China is 10.7%. Using the handy "divide into 72" rule, (which is amazingly accurate for most interest rates of interest) this implies the Chinese economy will double in 6.73 years, but the fact that the DFI itself is rapidly increasing (24% last year from 2005) implies that even if the growth internal rate (less DFI) is lower for 2007, the Chinese economy will be twice as big in less than 6 years!

The GDP of China in 2006 was equal to 2.69Trillion dollars. Thus, the DFI was more than half of the GDP! (52% to be exact). I have quoted him before, but it is worth repeating what Carl Marx said many years ago. (I skimmed Das Kapital, in the original, back when I was learning German and this is the only thing that still sticks in my mind.) In English, (as I no longer have command of German):

"A Capitalist will sell you the rope with which to hang him."*

German GDP in 2006 was 2.89Trillion dollars, slightly ahead of China for the third spot but clearly in 2007 China will be the third largest economy in the world. Probably by 2010, China will bump Japan down to the third position.

The US will be going to second position several years later. When is impossible to predict as it (IMHO) will be caused more by the collapse of the US's GDP (produced by the >10% interest rates** in US, which will be needed to keep foreigners still willing to hold Treasury bonds. - I.e. to compensate for the continuing falling in value of the dollar.) than by the continued growth of China.
---------------------------------
*The greatest capitalist are found in the management of big banks. They have not only been pouring funds into China to buy China’s in creditably badly run banks (Actually just “loan centers” for the state industries that should have been allowed to go bankrupt, but were not.) but these western bankers are drooling to teach the Chinese about credit cards. The wealth, without credit, of the Chinese middle class is growing extremely fast. (In large part do to the corruption, which puts a significant part of the DFI into pockets instead of new factories - you must have umpteen permits for a new factory and each requires some “under the table” cash. -Why more million dollar homes are being built in China that all the rest of the world‘s total!) This wealth does not stay concentrated, as “trickle down” does work in China. Thus, in about a decade, the purchasing power of the Chinese middle class will EXCEED that of ALL Americans and China will have little need of the American market, especially true when one considers that most of China’s surplus available for export, after greatly increased domestic consumption, will be going to South America & Africa as a result of the many long-term deals that China has recently made to assure itself of the raw materials it will need to import.

China is losing nearly a million peasants (many are farmers) EACH MONTH to urban centers and China does not have sufficient farm land to feed it self if the population can afford some beef instead of rice only. For example, cheap Chinese shoes, TVs, cell phones, cars, tractors, railroad cars, etc will be coming to Brazil, not to USA, to pay for the huge shipment of soy beans, beef, alcohol, and iron ore, etc. that Brazil will send to China. - I.e. US will be left out in the cold, except when it can compete with Brazil to supply food to China. Unfortunately, the foolish US drive to make alcohol from Iowa corn, etc may make too little crop land available in US for both feeding Americans and export; However, with a much weaker dollar I expect that the trade balance between China and US will finally be slightly in the US’s favor.
------
**The trade deficits (and war) are adding to the US debt. Even the recent rate increase to 5.25% is making carrying the old debt more costly and impossible without additional borrowing to cover the higher interest cost. The US has now passed the "point of no return" (to lower interest rates). The alternative to very high rates in the near future is to pay off the maturing bonds with freshly printed dollars, instead of borrow more. (Many bond holders are refusing to "Roll" the maturing bonds now and quite a few central banks are even reducing the percent of dollars held in their reserves.)

If the US does pay off the maturing bonds with freshly printed dollars, that will at best be only a very temporary restrain on interest rate rise as the resulting inflation will accelerate the fall of the dollar and then foreigners will require even higher rates to compensate for the drop in purchasing power of their bond's principle.

SUMMARY: The cheap-energy WWD was fun, but now that energy is expensive, it is time to pay the Asian piper. US is charged extra, compared to Europe’s bill, as piper had to drive all the way out to US’s “suburbia.” (Ref to my posts about the foolish “suburban infrastructure” the US has uniquely built.)
WWD = Western World’s Dance

 

[quadraphonics]

Here are numbers (2006 totals) for you on this:
DFI into China was 1.4 trillion dollars (converted from the Yuan actually invested to dollars at 7.8Y/$)

I don't know where you got this figure, but it's grossly inaccurate. Actual DFI in China is something like $60-70 Billion per year:

http://www.industryweek.com/ReadArticle.aspx?ArticleID=13608

Also, it would not be a good thing for China to have half of their GDP consist of FDI, so I'm not sure why you're so triumphant about your incorrect figure...

Also, there's no chance of Brazil ever playing a leading role in Chinese trade. The two biggest trading partners of China are the EU and USA, which together account for almost half of the world's economy. The idea that Brazil (whose GDP is less than America's military budget) will dominate trade with China is flatly ludicrous.

 

[Billy T]

I don't know where you got this figure, but it's grossly inaccurate. Actual DFI in China is something like $60-70 Billion per year:

http://www.industryweek.com/ReadArticle.aspx?ArticleID=13608

Interesting. My data comes from the business section (page B6 of 26 Jan07) of a Folha de Sao Paulo article. Also stated there is the fact that DFI was 52% of China's total GDP, which I admit I thought was a little high, but the article said DFI provided 20.5% of Brazil's GDP so I did not question much.

Do you agree with China's 2005 GDP being 2.68 trillion? If yes, then we are only dicussing what fraction is FDI - your number seem to me to be much too low a percentage, considering China has a much smaller GDP than the US still and leads the world in DFI, I think, but with the falling value of he dollar, perhaps the US leads in DFI. (Much easier now, with weaker dollar for Hundi et.al to buy US part of Chrysler etc.)

I do not remember the sum or the name of the Chinese bank accurately (Something like the "Chinese International Bank of Commerce" - one of the larger one in China and the first major one to let control pass into foreign hands - I seem to recall that purchasing only it, put something like 50 billion dollars into China. Another, larger bank recently opened by IPO was the largest IPO in the history of the world I seem to recall.)
Your data comes from a magazine called "Industry Week" - perhaps they are only counting the DFI going to build new factories? I suspect that speculators buying Yuan in the hope that it will become more valuable, may be putting more that your reference’s total of FDI into China. I am even tempted to try to buy Yuan as I think it will go up in value and strongly expect the dollar will continue to go down, but I have little experience with FEX contracts etc. so have not done so, yet.

...so I'm not sure why you're so triumphant about your incorrect figure... The idea that Brazil (whose GDP is less than America's military budget) will dominate trade with China is flatly ludicrous.

I am not "triumphant" and never said Brazil will dominate trade with China.

I do believe that the US production, (especially the part of GDP used for export form typical obsolete US factories) will contract significantly if (I think “when”) interest rates are greater than 10% in the US because the only other alternative is to run printing presses to pay off maturing bonds that foreigners are increasingly unwilling to roll into new US debt issues. Central Banks are already reducing the fraction of their reserves held in dollar denominated issues etc.

US will never default on its bonds. I doubt that the deficits will be significantly reduced, with baby boomers retiring, the Iraq war, etc so the debt will keep climbing. Now that interest rates have started back up, the increasing cost of carrying the old debt even if more were not being piled on top ever year is climbing faster than the debt itself. Thus the choice now facing the US for paying off the maturing bonds is either:
(1) Run the presses to make more dollars
Or
(2) Raise interest rates even more to persuade foreigners to continue to finance the growing debt, despite the falling purchasing power of the dollar.

For the last 6 months or so, the current interest foreigners have been getting has not covered the loss in the principle's purchasing power. - No one will long invest in some asset giving a net negative return! Even if they liked the US, which increasingly they do not. (Only in the early days was even Israel able to sell "negative net return" bonds. )

As Bernache has long record of controlling inflation, I think he will chose (2) despite that crushing the US economy. - He does not need to run for re-election. Any politician would chose (1) and blame the resulting inflation on others (sellers of commodities, especially oil etc.)

 

[quadraphonics]

My data comes from the business section (page B6 of 26 Jan07) of a Folha de Sao Paulo article. Also stated there is the fact that DFI was 52% of China's total GDP, which I admit I thought was a little high, but the article said DFI provided 20.5% of Brazil's GDP so I did not question much.

Well, somebody at Folha de Sao Paulo must have missed a decimal point or something, because those numbers are way off. According to the Chinese Government, FDI for 2005 was $72 Billion:

http://www.china-embassy.org/eng/gyzg/t257288.htm

Total world FDI is only like $500 Billion per year. FDI in Brazil runs about $15 Billion a year, or about 2% of the GDP. The US attracts about $20 Billion in FDI every year, and has been one of the most prominent destinations for FDI for decades.

 

[Billy T]

To Quadraphonics (et al):

Your 2005 data (72Billion, US$) for Chinese FDI is an upward revision of 12 billion made in June 2006 to include the DFI into the financial sector, which was not previously included. The opening of the financial sector in 2005 was very little compared to what happen in 2006. 2005 was just the feeble beginnings of a major policy change in 2006. - One so great I even started a thread on it as the introduction of credit card by western banks buying control of Chinese banks in 2006 greatly expand the purchasing power of even the lower middle class in China, as it did in the USA many years earlier.

The data I quoted (1.4Trillion), from local financial pages, was FDI in 2006 but stated to be a 24% increase over 2005. (This implies my source though FDI in 2005 was 1.12Trillion or 1120Billion, so there is large conflict with your 72Billion for 2005 FDI.)

Your data seems more reasonable because then (72/1120) for the DFI/GDP fraction in 2005 is 6%, which is a reasonable, but large part of the increase in GDP in 2005 as I would expect it to be. (I no longer remember the % for 2005, but it was also something like 10%.) I.e. it is reasonable that slightly more than half of China's GDP increase each each year now is due to FDI.

Resolution of this conflict does not however resolve our more significant conflict. The one in which I expect the US troubles to lead to a global depression, causing great drop in US GDP, and yet relative little impact on China as its internal demand (once Chinese learn what credit cars are, etc) is rapidly growing as are its obligation to South American and African countries. Yes, a "global depression" will be disruptive for China also, but it is rapidly positioning itself to replace the US market it now sell to with these newer markets and its domestic demand.

I know you think this will be impossible, and that is no doubt correct, if your time scale is short, but I have always been speaking of "a decade or two" and my view that China will be world's largest economy on this decades time scale is unchanged. However, US GDP going down will be more of a factor than China's fantastic growth as I too think China's GDP growth will drop below 10% annual range soon (because rising energy prices slow all GDPs).

We will just need to wait and see which of us is correct. - I hope you are right, but honestly I do not see how you can be, for reasons I have often stated. (War cost, retiring baby boomers, rising interest rates and associated rising cost of carrying even the old debt, growing debt, average wage in US going down or at least stagnate as "working at MacDonalds" replaces "working at GM" further reducing government tax incomes, current negative real returns to holders of US bonds*, confirming the wisdom of central banks that are reducing dollar fraction of their reserves, - all these items mutually interacting to further increase the instability of the dollar, US economy.)

I think the first indicator of who is right will be the direction of significant (greater than 1/4%) interest rate changes. I tried to get you to bet on this months ago. I will again offer 2 to 1 terms favorable to you. Namely I bet current 5.25% goes to 6.25% before it goes to 4.75% - will you take my bet now? Most professionals hold your POV and surely must think I am crazy to expect 6.25% before 4.75%. - You even gave me a link a few post back where in the FED's OMC meeting of 29Jan07 they stated that they expected the next move would be down. Why not take my bet? (We can negotiate the amount of public groveling the loser must do, etc, later.)
-------------
*TIPs and others with inflation correction of principle for the decreasing purchasing power of dollar are excepted, of course. (Why I own TIPs, despite the lower interest rates, with assets I could not economically get out of dollars for tax reasons.)

 

[okayillgonow]

If U.S. productivity growth does not keep up with that of its trading partners, the United States will quickly lose its international competitiveness and not be able to export any products, and its standard of living will fall. Evaluate this statement.

There's no way I could agree more; USA has maximized its production & productivity, so that it grows much slower than alot of other nations. According to the CIA world factbook, in 2006, USA's economy grew 3.40%, while the People's Republic of China, the world's fourth largest economy, grew 10.50% (this is a large percentage by the way).

USA's economy will be damaged by its trading partners due to its small percentage of economic growth. As a result, USA will no longer be the largest economy on earth.

 

[quadraphonics]

There's a couple of different ways that FDI and its impact are measured, so maybe these are getting confused here. When one talks about the size of the FDI into (or out of) a country, one means the actual value, in exchange rate terms, of the money spent gained by selling of domestic assets to foreigners (or buying foreign assets, in the case of outward FDI). In some cases the money is used to build the asset in question, and in others it's simply paid to the owner of an existing domestic asset. This is about $500 Billion a year for the whole world, and doesn't represent more than a couple % GDP for even the largest FDI recipients. The numbers for a given country are pretty volatile, since there are $50 Billion deals that take years to negotiate, and so the numbers can fluctuate wildly from year to year. So, you can't read a whole lot into a big swing in FDI for a given country in a given year. We discussed this a few months back, when the UK had lept into first place for a while. That said, China has been one of the top destinations for FDI for some years now, along with India and the United States.

The other measure people use looks at the productivity of assetts purchased by FDI. Which is to say, you total up the output of FDI ventures in a country, and look at how it does from year to year. Growth in this measure tends to make a country attractive for FDI, as foreign investors are looking for investments that will grow a lot. To get an idea of the importance of FDI to a given economy, you can then look at the output of FDI ventures as a percentage of GDP. It's these figures that run to the 10's of % GDP for countries like China and Brazil, reflecting the productivity gains of new, modern infrastructure, particularly for developing countries.

So, much of the growth in production in China is fueld by FDI (not surprising), but it's important to also consider where the growth in demand is coming from. It's not export markets. As you constantly remind us, Chinese GDP has been growing by 10% for years, but you'll find that US (and world) imports of Chinese goods haven't grown anywhere near that quickly. This implies that most of the growth in productivity has been used to meet growing domestic demand all along. This is also not surprising, as it's very difficult to find examples of national economies wherein productivity growth isn't highly correlated with demand growth, no matter how export-led a country may be.
So, it doesn't make sense to speak as if China will one day no longer need the US market. In terms of demand growth, they could switch away from being export-oriented today, and still maintain decent growth. But they don't, and it's because they can sustain even higher growth rates by exporting a lot, both because of access to more markets and because it helps them attract FDI, which fuels production growth.

Let's not forget what FDI really represents: *foreign* ownership of domestic assets. So, that significant portions of the Chinese and Brazilian GDPs are generated by FDI projects (and that most of the growth occurs in this sector) implies that said foreigners are reaping a lot of the benefits of growth in these countries. As you like to say, it's Toyota plants in Ohio with the profits going to the various (largely foreign) stockholders. So, it's a bit bizarre that you consider this arrangement as dire for America, and yet celebrate it when foreigners (many of them Americans!) own a quarter or more of the production in Brazil and China.

Which brings up the role that FDI plays in developed economies. Basically, it allows them to invest more than they save or, equivalently, spend more than they make. In America's case, that Toyota factory the Japanese built in the Midwest is one less factory American investors need to build, freeing up their investment money for buying into high-growth developing countries. This keeps the value of US stocks growing, increasing American household wealth without any increase in savings.

So, it works like this: Americans save very little, and run a big trade deficit. This leads to foreigners accumulating large sums of dollars. Then, the foreigners have three choices. They can buy American good with the dollars, which will tend to cause inflation in the dollar and equalize the trade deficit. Or, they can just sit on the dollars, maintaining the trade deficit and preventing dollar inflation (which allows the US to run low interest rates without inflation), as well as lower volatility in their currency and maybe give them some leverage with the US. Lastly, they can invest the money in American assets. But as long as the dollars are either sat on or invested in America, Americans can continue to run a trade deficit and a low savings rate. To the extent that foreigners want to simply sit on their dollars, America can also keep interest rates low and thereby finance budget deficits and further consumption-led growth. So, as foreign countries develop, they typically start out by sitting on their dollars, attracting lots of FDI (specifically American) and going into rapid growth.

Eventually, there comes a time where their stock of dollars gets a little ridiculous and they're ready to start the transition to being a developed economy. This is usually done by shifting from sitting on dollars to investing them in America. While this does exert upward pressure on interest rates, and so make it harder to finance budget deficits, it doesn't necessarily spell the end of low savings or trade deficits. In fact, it usually signals the beginning of the end of the developing country's hot growth phase. This, in turn makes it a less desirable FDI destination, and the process starts all over again in some other underdeveloped country. The only difference is that it happens faster every time, because the world economy has become more productive and developed, so there are more source of FDI and export markets for developing economies to leverage.

 

[swivel]

Quadraphonics, I'm learning more good economic theory in this thread than I did in University. Thanks for the wonderful posts and reasoned analysis.

 

[Billy T]

Quadraphonics, I'm learning more good economic theory in this thread than I did in University. Thanks for the wonderful posts and reasoned analysis.

I too thank him. Have learned from him in the past. (for example did not realize until he told me that the retiring baby boomers conversion from savers to widthdrawers of saving was a ( if not the) major factor in the low US saving rate. I will need to read his last post a couple of time more before I fully understand it. I had only Economics 101 in college so not hard for me to also say this thread has increased my knowlege more.

 

[swivel]

I too thank him. Have learned from him in the past. (for example did not realize until he told me that the retiring baby boomers conversion from savers to widthdrawers of saving was a ( if not the) major factor in the low US saving rate. I will need to read his last post a couple of time more before I fully understand it. I had only Economics 101 in college so not hard for me to also say this thread has increased my knowlege more.

Agree. However, there are some other posts that can set your knowledge back quite a bit. Like the above poster who said that "USA has maximized its production & productivity". Comments like that can destroy a susceptible brain. And I fear a lot of the casual readers of this forum will scan over that comment, and commit it to memory, and not wring the sweetness out of quadraphonics' posts.

So they will go away thinking that productivity is something that can "max out". They won't understand that when Intel and AMD release a new series of CPU's, and these chips become integrated into the workplace and home, that productivity goes up. Or that the improvement of battery technology will increase productivity. Or that more businesses do more of their filing electronically every year, which sees enormous gains in productivity. They won't understand that the United States has accounted for ~%42 of global production since 1982, while the percentage of the population which accounts for that level of production has shrunk, which means that productivity must have increased. Instead, they will just read a negative comment which already agrees with a misguided ideology, and file it away as more "evidence" for their conspiracy-theory economics.

 

[Billy T]

....they will just read a negative comment which already agrees with a misguided ideology, and file it away as more "evidence" for their conspiracy-theory economics.

I agree. Anyone who thinks there is some grand "conspiracy" at work in modern economics just does not have the slightest under standing of the modern world. There are sometimes economic actions of (1)individuals, (2)small groups, or (3)countries that can significantly (but still only slightly) change the economic landscape, but it is only their plan old "self-interest", not "conspiracy" at work when this does happen.

For example of (1): George Sores, broke the bank of England, changed the exchange rate of the pound, to profit, not as a part of a "conspiracy."

Two examples of (2): Directors of OPEC, try to control the price of oil, not very successfully, for their own advantage (which they are wise enough to realize does not mean the highest current price, but a reasonable stable one, but not so high as to make greener alternatives economical). The AMA, to some extent in US at least, tries to control the supply of new doctors (limits med schools acceptance numbers) etc.

Some examples of (3): US went off gold standard - probably the largest impact ever as that made money full only fiat currency. More recently, Indonesia put one day of currency control in place. For last several weeks, central bank of Brazil has been buying in the open market more than half a billion dollars every business day in a desperate effort to stem the fall of the dollar, relative to the Brazilian real. (This must soon stop soon as they are getting only 5% or less return on these purchased dollars and paying 13% on the local currency on the bonds they are issuing to afford this. - I know what will happen, and when: On March 7, when they next meet, Brazil's "FED", will be sharply lower the current stupidly highest in the world real interest rates, which only add to influx of dollars caused by Brazil's large export of commodities. These high rates were necessary for years to break the local "high inflation is inevitable" mentality, but Brazil's inflation has been less than 4% annual for several years and these high rates have done their job.)

SUMMARY:
To say that there is some "conspiracy" in global economics is silly - too many players each trying to advance, often at the expense of others, but it is usually a "positive sum game." I would sooner believe that part of a herd of 1000 cows was “conspiring” to get a "corner" on the "sweetest grass" as that makes more sense. - Many animals do have complex social structures, but there is not much of one in large cow herds.

 

[MetaKron]

I think people and economists began saying exactly the same things after the Korean War ....and they've been saying over and over and over and over .....

And strangely, the US hasn't collapsed and, equally important, it's standard of living keeps climbing.

"The sky is falling! The sky is falling!"

Baron Max

I don't think that the standard of living keeps climbing. I think that the illusion is firmly in place, but the actual quality has declined.

 

[Baron Max]

I don't think that the standard of living keeps climbing. I think that the illusion is firmly in place, but the actual quality has declined.

Perhaps you should tell all of the economists that, because I don't think many, if any, would agree with you.

Baron Max

 

[swivel]

Billy T, the reason for OPEC is to keep production levels down. When the Middle Eastern countries nationalized (read: STOLE) the oil industries set up by foreign investors, they quickly began pumping as much of the oil as possible, which drove the price down. It was a unique economic situation. If you wanted to make a profit, you had to pump a certain amount. But, if you only pumped this amount, your neighbor could pump a little more, and ride on the higher price that was being propped up by your good sense. They could free-ride on the responsible producers. This exact scenario has popped up everywhere oil has been discovered. Pennsylvania and Texas notably went through turmoil as gluttons would come in and ruin the economics of pumping for everyone.