@michaelxpettis's Threads
Although I instinctively support any call to reduce the US military presence abroad, and would also like to see the US bear less of the exorbitant burden that comes from the dominant role of the US dollar, I don’t think this article gets it right in...
newrepublic.com/article/156325…
newrepublic.com/article/156325…
...describing the relationship between the two. For one thing, the 19th Century “dollar diplomacy” to which it refers has nothing in common with the current dominance of the dollar: it merely refers to the fact that Washington was willing to lend or give money to further its...
...foreign policy objectives, something it could do even though the US dollar was a fairly minor global currency at the time, contrary to what the author implies. China, after all, is able to do even more under BRI with a currency of negligible global importance.
What’s more...
What’s more...
Provincial debt is already a serious problem, and this year it is likely to get much worse as the government counters the impact of the coronavirus on consumption with a bigger boost to public sector investment. What a lot of economists...
scmp.com/economy/china-… via @scmpnews
scmp.com/economy/china-… via @scmpnews
@SCMPNews ...don’t consider is that financial distress costs are convex, not linear with debt, which means that they rise more quickly than debt. If a country has a provincial debt problem, in other words, it can be worse if the provincial debt is unevenly spread than if it is evenly...
@SCMPNews ...spread, although that also depends on how easily businesses and economic activity can move from province to province.
The debt-seminar students who meet at my house every week have been working on figuring out the optimal ways in which to resolve provincial...
The debt-seminar students who meet at my house every week have been working on figuring out the optimal ways in which to resolve provincial...
“Something like Libra would make transactions costs much cheaper. Major central banks need to appeal that they, too, are making efforts to make settlement more efficient with better use of digital technology.”
But why? Shouldn't we first...
scmp.com/economy/global… via @scmpnews
But why? Shouldn't we first...
scmp.com/economy/global… via @scmpnews
@SCMPNews ...ask how useful it is to reduce transaction costs associated with payments transfers, and for whom? If lower transaction costs spur activity in the markets for real goods and services, or if they encourage greater long-term investment in productive economic activity, then...
@SCMPNews ...they are good for the economy, but transaction costs are already so low that it is hard to imagine they will make much difference to “real” transactions. If lower transaction costs encourage more speculative activity, capital flight, investment fads, and debt, however, then...
I apologize in advance for this long rant, but there really should be more outrage about this. I spent and enjoyed most of my career running bond trading and capital markets desks on Wall Street, and so I'm definitely not reflexively..
ft.com/content/6d0bc9… via @financialtimes
ft.com/content/6d0bc9… via @financialtimes
@FinancialTimes ...anti-Wall Street, but it's incredible that, as this FT article puts it, “Wall Street has emerged as one of the main winners from the ‘phase-one’ accord with Beijing”. In fact they are the only winner on the American side.
The trade deal is supposed to address real problems...
The trade deal is supposed to address real problems...
@FinancialTimes ...faced by American workers and local businesses, and the concessions Washington obtained from Beijing in exchange for access to US markets were meant to boost the US economy. Washington has every right and reason to intervene in the trade and capital imbalances in which...
There has been a lot of discussion about what exactly it would take for China to achieve the 2020 target of doubling 2010 GDP now that the NBS have revised the 2014-18 numbers . For those who are interested, here are the newly-revised GDP growth rates for the past ten years:
2019 -- 6.10%
2018 -- 6.70%
2017 -- 6.90%
2016 -- 6.80%
2015 -- 7.00%
2014 -- 7.40%
2013 -- 7.80%
2012 -- 7.90%
2011 -- 9.60%
For China to double its real GDP over the previous ten years, 2020’s GDP growth rate would have to come in at just above 5.6%.
I had been...
2018 -- 6.70%
2017 -- 6.90%
2016 -- 6.80%
2015 -- 7.00%
2014 -- 7.40%
2013 -- 7.80%
2012 -- 7.90%
2011 -- 9.60%
For China to double its real GDP over the previous ten years, 2020’s GDP growth rate would have to come in at just above 5.6%.
I had been...
...hoping (but not really expecting) that Beijing would allow reported GDP to drop this year to 5.5-5.6% – which is still way too high but at least moving more quickly in the right direction – but Beijing seems to be targeting something between 5.8% and 6.0%.
These are small...
These are small...
Another long tweet, for hard-core debt-restructuring geeks: It’s not easy to understand the overall impact of these swaps on China’s debt burden. In some cases, especially, apparently, with SOEs and state-bank creditors, the debt is erased with a...
reut.rs/2FMrC7g
reut.rs/2FMrC7g
...transfer of equity from the indebted company, but the creditor bank may put the equity back to the company at a price that guarantees no loss. Instead of a debt/equity swap, in other words, this is really a debt/long-term-repo swap.
More important is the question of who is...
More important is the question of who is...
...absorbing the loss. The key to any debt resolution is assigning the loss. If debt/equity swaps are being done as swaps of equal market value – which everyone is pushing Beijing to encourage, ironically – then there really is no net improvement in the debt burden. The losses...
Very interesting paper comparing the similar experiences of Japan and Finland up until 1990, and their subsequent divergence, especially this: “In both countries monetary and fiscal policies, under a regime of currency regulation, were used to channel resources towards...
...industrialization. Capital flows were tightly-managed, and interest rates were set below market-clearing levels. This forced national savings toward investment and allowed for only essential consumption.”
The point is that Japan responded to the real estate boom, soaring...
The point is that Japan responded to the real estate boom, soaring...
...debt, and years of non-productive investment by circling the wagons and protecting the banks in ways that saw no “crisis” reduction of GDP, while Finland responded to the same problem by cleaning up insolvencies and forcing losses to be taken. Japan stagnated the next 2-3...
Actually this is a pretty common nonsense from foreigners who don't understand modern Chinese culture. There are basically two rules they bring to Chinese art with which they insist Chinese artists must comply. One is that their work must be recognizably "oriental" in a way...
...that fits into the stereotypes of Chinese culture with which they are most familiar. The other is that is must be fiercely anti-establishment in the same way American and European artists sometimes are. This article clearly fits the former.
In fact urban youth culture in...
In fact urban youth culture in...
...China has exploded in the past two decades, and because young Chinese have undergone a social transformation unprecedented in history, it has become among the most exciting around. In fact there is a huge amount of interest in Chinese music from...
For debt geeks out there, this is an excellent summary of Argentina’s recent debt travails, by Martín Guzmán, the Columbia University professor who recently became Argentina’s Minister of the Economy.
As Argentina begins to renegotiate its debt and...
ssrn.com/abstract=28611…
As Argentina begins to renegotiate its debt and...
ssrn.com/abstract=28611…
...seek debt relief, I would add that there is often confusion about the political or geopolitical aspects of sovereign debt restructurings. When a country like Argentina has difficulty paying off its foreign creditors, it is easy to misconceive the conflict as one primarily...
...between “their” interests and “our” interests. But that’s the wrong way to look at it. It is just as much a conflict between “our” bankers and wealthy savers and “our” producers, manufacturers and workers.
This is because when the external debt burden is excessive, capital...
This is because when the external debt burden is excessive, capital...
I apologize in advance for the long tweet, but this is a story worth remembering and which I’ve written about often. From the late 1930s to the late 1960s (excluding WW2), the USSR had consistently targeted (and met) such high GDP growth rates that very few economists doubted...
...Paul Samuelson’s 1961 claim that sometime after 1984 the USSR would easily overtake the US to become the world’s largest economy. Of course in retrospect this turned out to be so absurd a prediction – after peaking in the early 1970s, once debt constraints kicked in, the...
...USSR lost roughly 3 quarters of its share of global GDP in 2 decades – that afterwards everyone denied ever having believed it.
It’s not just the USSR. Every country that followed this high-savings, investment-led, input-directed growth model (Germany in the 1930s, Brazil...
It’s not just the USSR. Every country that followed this high-savings, investment-led, input-directed growth model (Germany in the 1930s, Brazil...
Diverting household savings from bank deposits to the stock market is an interesting idea, and certainly bullish for Chinese stocks in the short term, but Beijing should understand the impact on Chinese volatility. To the extent that the...
scmp.com/business/compa… via @scmpnews
scmp.com/business/compa… via @scmpnews
@SCMPNews ...CBIRC is successful, especially in diverting the savings of ordinary households (i.e. not the rich), it would increase balance sheet inversion and, with it, the underlying volatility and procyclicality of the economy.
This is because when the Chinese economy is doing well...
This is because when the Chinese economy is doing well...
@SCMPNews ...the resulting increase in stock prices would cause Chinese households, feeling richer, to increase their consumption. This “wealth effect” would further boost demand, causing Chinese growth to pick up even more. The problem is that virtuous cycles are simply the obverse of...
I don’t know enough about the Portuguese economy to say if its recent performance is sustainable, but its experience does remind us of the difference between becoming “more productive”, as Portugal seems to be doing, and becoming “more competitive”, as...
kontrast.at/portugal-econo…
kontrast.at/portugal-econo…
...other European countries also hit by the global crisis have had to do. The former comes about by investing in productivity-enhancing education or technology or in productive infrastructure. The latter can come about either by increasing productivity or by lowering wages...
...relative to production (directly, as Germany did after 2003-05, or indirectly, as China did in the 1990s and 2000s).
Unfortunately it’s been mostly the latter in the past few decades. The problem is that for countries that become competitive by lowering wages, additional...
Unfortunately it’s been mostly the latter in the past few decades. The problem is that for countries that become competitive by lowering wages, additional...
There is a lot that is very good about this IMF piece on debt, especially its reference to non-linearities in the structure of debt, but it has a serious flaw in that it implicitly assumes (as do nearly all economists, to be fair) that excessively high...
imf.org/en/Publication…
imf.org/en/Publication…
...debt levels are a problem to the extent that they result in debt crises. In fact debt crises are caused not by high debt levels but by seriously mismatched balance sheets, and while high debt levels can certainly lead to balance sheet mismatches, they are not the same thing...
...What is more, to argue that high debt levels are "bad" because they may lead to debt crises is perfectly circular: they wouldn’t if they weren’t already bad. As John Mills argued as far back as 1868, the problem is the extent to which debt is the consequence of bad economic...
This excellent piece on the history and sources of US economic development and growth should be more widely read, especially in Washington. One thing that stands out, contrary to much public perception that sees US success as the inevitable consequence...
academic.oup.com/past/advance-a…
academic.oup.com/past/advance-a…
...of its free-market orientation, is the crucial role of a strong and interventionist state sector that “harnessed, managed and manipulated markets”, rather than simply establish them and let them operate freely.
They “cajoled, nudged and pushed private interests in...
They “cajoled, nudged and pushed private interests in...
...economically desired directions by tying ‘carrots’ — subsidies, protection and incentives – to the ‘discipline’ of demands such as moving investment towards industrial development and technological upgrading, which capitalists, despite their much inflated reputation as...
If all he is saying is that China’s ownership of US Treasuries gives it no control over the US, Mosler is of course right, but, as is often the case with MMT, his argument is incomplete, especially if he is also arguing that the accumulation of US Treasuries by a foreign...
...government (not just China) whose economy is running large trade surpluses with the US doesn’t matter. One obvious reason is that the process of reserve accumulation has effectively converted US demand into savings. This is good for the US if it is a developing country...
...whose investment needs are constrained by weak savings, but bad for the US if investment is constrained by weak demand (which is clearly the case in all advanced economies).
A second obvious reason is his failure to note that there are 4, not 3, things China can do with...
A second obvious reason is his failure to note that there are 4, not 3, things China can do with...
“To meet Beijing’s lending target, banks are forced to work with riskier borrowers.”
I’ve long argued that because real, sustainable demand is so weak, banks can only expand private sector lending by lowering lending standards and...
ft.com/content/2099c1… via @financialtimes
I’ve long argued that because real, sustainable demand is so weak, banks can only expand private sector lending by lowering lending standards and...
ft.com/content/2099c1… via @financialtimes
@FinancialTimes ...finding borrowers who either need to repay more expensive debt, buy back stock, speculate on real estate or other assets, or who are excessively optimistic about economic conditions and willing to take huge risks on someone else’s money. While some of this lending may end...
@FinancialTimes ...up creating productive assets, most of it will simply increase the riskiness of the system or get lost in ventures that don’t add to China’s net productive capacity, including projects that cannibalize other projects.
In the mid-2000s Beijing pressured banks to expand...
In the mid-2000s Beijing pressured banks to expand...
Xi Jinping has been placing top bankers and finance officials in senior provincial policy roles across the country. I think this is an important indication of how concerned Beijing has become over how to address provincial debt issues. By appointing financial vice governors...
...and bankers in several important policy-implementation roles, Beijing is acknowledging that the old business-as-usual approach to debt has failed pretty badly and that they must address it more imaginatively and aggressively.
I heard about this several weeks ago at a small...
I heard about this several weeks ago at a small...
...presentation for friends by Plenum, the new China-based research group who are quoted in this article. They pointed out at the time that it is pretty rare for technocrats and non-politician types to get so many of these provincial roles, so this change may be quite...
According to People’s Daily, foreign purchases of Chinese bonds this year were equal to just over 1% of GDP and a little below 5% of the PBoC’s foreign exchange reserves, which implies that including foreign stock purchases (broadly comparable in...
en.people.cn/n3/2019/1225/c…
en.people.cn/n3/2019/1225/c…
...size), foreign portfolio inflows had a far from negligible impact on domestic monetary easing. More generally, my back-of-the-envelope calculation suggests that total outstanding foreign ownership of Chinese stocks, bonds and mutual funds is equal to roughly 5-6% of GDP...
...and 20-30% of PBoC reserves.
I don't think these numbers are high enough yet to be a problem, but they are rising quickly (more than doubling in four years), so that in 2-4 years, foreign portfolio inflows could be high enough to leave China susceptible to the risk of...
I don't think these numbers are high enough yet to be a problem, but they are rising quickly (more than doubling in four years), so that in 2-4 years, foreign portfolio inflows could be high enough to leave China susceptible to the risk of...
According to this article, exiting the euro would be disastrous for Italy because it would lead automatically to debt default. This is probably true, but it seems like a pretty incomplete argument. Remaining in the euro is likely to prevent Italy from...
brookings.edu/blog/order-fro…
brookings.edu/blog/order-fro…
...growing out of its debt anyway, as has already been the case for a decade, which would mean the economy suffers from several more years of no growth until it eventually defaults anyway – either explicitly or implicitly.
By the way that's always what happens to countries...
By the way that's always what happens to countries...
...with excess external debt (both developing and developed): economists and "money doctors" will insist that with the "right" growth-enhancing reforms (which are always the same), they can eventually outgrow the debt, but I can’t think of any case in the past 200 years in...
This could be an interesting development. In the 1920s and 1930s the US proved what should have been obvious: countries that lend substantial sums abroad (and run the corresponding trade surpluses) must constantly expand their lending to...
scmp.com/news/china/dip… via @scmpnews
scmp.com/news/china/dip… via @scmpnews
@SCMPNews ...unsustainable levels if they refuse ever to allow their large trade surpluses to become trade deficits (or they must forgive the debt). Net repayment of foreign lending requires that the paring country run surpluses and the receiving county runs deficits.
In my 2013 book I...
In my 2013 book I...
@SCMPNews ...quote FDR’s 1932 lampooning of the Republican position:
A puzzled somewhat skeptical Alice asked the Republican leadership some simple questions:
“Will not the printing and selling of more stocks and bonds the building of new plants and the increase of efficiency produce...
A puzzled somewhat skeptical Alice asked the Republican leadership some simple questions:
“Will not the printing and selling of more stocks and bonds the building of new plants and the increase of efficiency produce...
The problem with capital outflows lies in the so-called “impossible trinity”: a country with open capital markets can choose to have a fixed exchange rate or independent monetary policy, but not both. Although China’s soaring debt requires monetary...
cnn.com/2019/12/19/bus…
cnn.com/2019/12/19/bus…
...easing to keep debt-servicing costs from crippling over-extended borrowers, when PBoC pegs the exchange rate, it can only ease in the case of net monetary inflows in the current and capital accounts (i.e. if central bank reserves rise), which is why the current account...
...surplus is so important.
PBoC attempts to resolve this with partial capital controls and with a “dirty” peg, which in turn allows partial control of domestic monetary policy, but as debt continues to rise, monetary easing becomes more urgent even as rising debt tends...
PBoC attempts to resolve this with partial capital controls and with a “dirty” peg, which in turn allows partial control of domestic monetary policy, but as debt continues to rise, monetary easing becomes more urgent even as rising debt tends...
Good Martin Sandbu piece, citing Josep Borrell, the EU's high representative for foreign affairs, as wanting the project to boost the euro’s status to be treated on a par with defense policy.
But Borrell and the other “European leaders” to whom this article refers are largely...
But Borrell and the other “European leaders” to whom this article refers are largely...
...clueless on the topic and probably should be kept as far away from interfering in the currency as possible. They seem to think that use of the dollar or the euro as an international currency is like the visibility of the flag: the more vigorously you wave it, the more...
...people will notice it. They clearly do not understand that the wide-spread use of the dollar (or of sterling, for that matter) rests partly on the depth, flexibility and openness of US capital markets and mainly on its willingness to absorb excess global savings and act as...
Good article. While IMF economists may be slowly coming around to the view that unfettered capital flows might not always be a great idea, most IMF officials and practitioners I know have long understood that they are almost never a good idea, at least for developing economies...
...I would add that they are not good for advanced economies either, and most economists (including John Maynard Keynes and Harry Dexter White during Bretton Woods) used to know this until quite recently.
The argument in favor of free capital flows rests on an implicit but..
The argument in favor of free capital flows rests on an implicit but..
...usually unacknowledged assumption: that international capital flows mainly reflect the uncorrelated decisions of rational, long-term investors to allocate capital to its most productive use (i.e. everyone is Warren Buffet), and that these flows force or allow countries to...
Washington has every right to try to address harmful trade imbalances but it’s hard to see what the benefits of these tariffs will be. Because steel and aluminum are liquid, global commodities, the tariffs will have little impact on...
ft.com/content/1ad2ff… via @financialtimes
ft.com/content/1ad2ff… via @financialtimes
@FinancialTimes ...American imports of either metal, or Brazilian and Argentine exports, except for some short-term bilateral disruption, and so it won’t help American metal producers (if it has any effect, it will be to help Chinese producers). It won’t help American farmers at all except...
@FinancialTimes ...perhaps for parsley farmers (apparently lots of iron in parsley). It won’t strengthen the Brazilian or Argentine currencies (especially the Argentine) and may even weaken them further. It will allow Argentines to blame Washington for a part of their problems and will...
