I was talking with a friend yesterday and he switched me on to something I had pondered but never really resolved. By effectively pegging their currency to the US dollar the Chinese have been creating an enormous real estate boom on their own turf for the past few years,while for a long time depreciating the purchasing power of their own citizens. I couldn't figure out why before. But could this actually be a strategic/military ploy by the Chinese government?
With manufacturing and other businesses in the US stifled by inflation and regulation, while not even being able to benefit from lowered exchange rates with other currencies, the Chinese are effectively allowing for the long run neutralisation of the US as a world power while democratically elected rent seekers work hard to fritter away what was once it's economic strength? This would leave China in the future to pretty much take the stage as the predominant world power, both militarily and industrially, especially in any scenario that could potentially lead to one of war in which tradelinks would be cut.
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That is true, but as I understand it this policy does not increase imports of goods, because what they import is Dollar bonds. Meaning production for internal consumption is not hurt by imports. So there actually is a net increase in employment. I agree that this is very bad for the country, but it does increase employment. In effect, it spreads newly created industrial employment to more of the unemployed peasants by lowering their purchasing power.
As for social stability, millions of peasants moving to the cities is not something the Chinese leadership has control over. That is happening because people have gotten a taste of capitalism and are no longer content in rural poverty. They will move to the cities whether there's work for them or not. Essentially the Chinese government faces the challenge of supercharging their economy to keep as many of these people busy so they won't stage revolts. Which that scheme seems to achieve.
As for the sustainability of this scheme, it is unsustainable (a bubble) in the Austrian sense, but as long as the Yuan keep getting devalued it could go on until those factory workers sweat away for practically nothing.
Smiling Dave:Nero, Let's take an extreme version of the same situation. The govt enslaves everyone and forced them all to work for free. We'll assume the slaves do this happily as well, so that none of the disadvantages of slavery kick in. Also, the govt tells the exporters to give the stuff away to the US. Can't get more competitive than that. What is the effect of this policy on the US? All the factories close down. Resources are freed up that can go to the military. Come to think of it, this is exactly what is happening. The US govt spends $1.5 trillion on their wars every year. The Chinese trade deficit [=giving us free stuff] is about half a trillion every year. So that the Chinese are financing one third of the US war effort.
Let's take an extreme version of the same situation. The govt enslaves everyone and forced them all to work for free. We'll assume the slaves do this happily as well, so that none of the disadvantages of slavery kick in. Also, the govt tells the exporters to give the stuff away to the US. Can't get more competitive than that.
What is the effect of this policy on the US? All the factories close down. Resources are freed up that can go to the military.
Come to think of it, this is exactly what is happening. The US govt spends $1.5 trillion on their wars every year. The Chinese trade deficit [=giving us free stuff] is about half a trillion every year. So that the Chinese are financing one third of the US war effort.
Dave, I don't get your point regarding the effect on the US, but looking at the extreme is a good way to illustrate the effects on China. So everyone works for free and the products are given away for free, can't get more competitive than that. Under these conditions certainly a lot more people in China would be employed because they are so cheap. So, we can say that this would increase exports and employ lots of additional people, which is the goal of the Chinese government. Since those workers get no compensation, they cannot purchase any imports, so this policy will not hurt employment for internal consumption. Their purchasing power is taken away to amass Dollar bonds.
EmperorNero: That is true, but as I understand it this policy does not increase imports of goods, because what they import is Dollar bonds. Meaning production for internal consumption is not hurt by imports.
That is true, but as I understand it this policy does not increase imports of goods, because what they import is Dollar bonds. Meaning production for internal consumption is not hurt by imports.
This is actually backwards. If you ‘import’ dollars you increase imports, not exports (if you get money, you must buy stuff). So, if the Chinese government is subsidizing exports and importing dollars in the form of US debt (unrelated with its peg), it will have face huge increase in imports and also in investment to foreign countries (Africa and Latin America anyone?) . So employment is shifted, not increased.
And of course I take the issue of massive urban migration to be ‘an issue’ only because it is in part caused by this artificial policy. Beyond that, there is nothing wrong with urban migration, to be sure.
If you ‘import’ dollars you increase imports, not exports (if you get money, you must buy stuff).
Nero,
I think we differ on what the Chinese get from us in return for the free stuff they give us. This wil help determine if it is a nefarious scheme to destroy us.
Everyone seems to be in sgreement that we get Chinese stuff made by them "for free", and give them US bonds in return, or dollars.
What can they do with those bonds and/or those dollars? Short answer: make larger and larger piles of them. That's it.
Of course, they might try buying huge swaths of real estate and American stocks, but so far they haven't, and I suspect laws will be passed to forbid them if they do it on as large a scale as they can afford.
So for right now, the situation is we get their stuff for free, get to keep all our resources, and slip them IOUs and dollar bills in exchange. We are getting by far the better deal. If it's a plan to destroy us, it's like a plan to empty the ocean by pouring water into it.
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EmperorNero: If you ‘import’ dollars you increase imports, not exports (if you get money, you must buy stuff).I don't understand. The Chinese central bank prints Yuan, they trade them for Dollars from exporters, now the Chinese central bank has Dollars. And they use them to buy Dollar bonds. Meaning that in effect the purchasing power of factory workers is transferred to bonds sitting in a vault. How does that increase imports?
Hm, you know what? You’re perfectly right, now that I think of it. Piling dollars removes the ‘excess’ purchasing power, which does not allow import to increase too. So yes, the policy does promote employment in exports, but still at the expense of jobs everywhere else. So, imports do not increase, but jobs are nonetheless shifter, not created.
Merlin:Hm, you know what? You’re perfectly right, now that I think of it. Piling dollars removes the ‘excess’ purchasing power, which does not allow import to increase too. So yes, the policy does promote employment in exports, but still at the expense of jobs everywhere else. So, imports do not increase, but jobs are nonetheless shifter, not created.
Why does it promote employment in exports at the expense of jobs everywhere else? If imports do not increase because their currency is pegged, Chinese workers (as a whole) have no additional ability to purchase imports, and there is no shifting of jobs. Keep in mind that China has few hundred million unemployed workers. Additional workers for export are not taken away from industries for internal consumption, they are taken from the pool of unemployed workers.
@ Smiling Dave:
Oh, Americans are greatly benefiting from this situation. At least in the short term, at some point the debt will eat us. My argument is not that this is to the detriment of Americans, but that the Chinese government does artificially strengthen employment by reducing it's peoples purchasing power. They do this solely to keep as many of their people busy as possible, to create social stability. That's my theory.
OK glad we agree. Your'e probably right.
EmperorNero: Why does it promote employment in exports at the expense of jobs everywhere else? If imports do not increase because their currency is pegged, Chinese workers (as a whole) have no additional ability to purchase imports, and there is no shifting of jobs. Keep in mind that China has few hundred million unemployed workers. Additional workers for export are not taken away from industries for internal consumption, they are taken from the pool of unemployed workers.
Because the subsidy to exporters is taxed directly from everyone else, which, as you point out, lowers their purchasing power. If people can buy less than they would with no peg, than shops and factories meant for internal production will close down and jobs will be lost. That there are unemployed people changes nothing. With no peg there would be more production for internal consumption, and more jobs there, unemployment notwithstanding.
It lowers the purchasing power per capita, but it does not lower the purchasing power of Chinese workers as a whole. In effect it stretches the existing purchasing power across more people. (In this simplified market.) So internal production should not be harmed. That's my guess.
EmperorNero: It lowers the purchasing power per capita, but it does not lower the purchasing power of Chinese workers as a whole. In effect it stretches the existing purchasing power across more people. (In this simplified market.) So internal production should not be harmed. That's my guess. If I tax 5 guys 100% to give everything to a sixth guy (take an extreme example), will the store that catered to six people function as it did, or will it be downsized? The worker that worked there will be laid off, and will go to work for the sixth guy, who knows that the only way he has to keep getting his tax money is to produce funny things no one needs. Just as taxation in general depresses the economy, so does this peculiar peg mechanism. The Regression theorem is a memetic equivalent of the Theory of Evolution. To say that the former precludes the free emergence of fiat currencies makes no more sense that to hold that the latter precludes the natural emergence of multicellular organisms. | Post Points: 20
If I tax 5 guys 100% to give everything to a sixth guy (take an extreme example), will the store that catered to six people function as it did, or will it be downsized? The worker that worked there will be laid off, and will go to work for the sixth guy, who knows that the only way he has to keep getting his tax money is to produce funny things no one needs. Just as taxation in general depresses the economy, so does this peculiar peg mechanism.
EmperorNero:I agree that this peg mechanism depresses the economy, all I'm arguing is that a greater number of people will be employed than otherwise. I don't quite understand the relevance of your example though. Chinese local production produces the same amount of goods, it just sells slightly smaller rations to slightly more people. More of the unemployed are now getting a share of the wealth pie of the employed, that stays the same size because of pegging.
Let us agree that than a peg-less China would have a more efficient production structure. The peg makes the production structure less efficient.
Now, we agree that employment and production in exports rises due to the peg. If overall efficiency and production fall but production in exports rise, does this mean that efficiency and production in everything but exports fall? Doesn’t his mean that employment in everything but exports falls, and cannot be recouped by the increase of employment in exports since we agree that the peg lower efficiency?
Merlin:Let us agree that than a peg-less China would have a more efficient production structure. The peg makes the production structure less efficient. Now, we agree that employment and production in exports rises due to the peg. If overall efficiency and production fall but production in exports rise, does this mean that efficiency and production in everything but exports fall? Doesn’t his mean that employment in everything but exports falls, and cannot be recouped by the increase of employment in exports since we agree that the peg lower efficiency?
Well that's adding a new variable, efficiency of the production structure. I certainly agree that every intervention of the commie government makes the economy less efficient, but does the peg in particular have that great an effect on efficiency? Normally we would consider it a form of inefficiency to distort the economy towards exporting, but if the goal is just to employ as many people as possible it doesn't matter what they produce or how efficiently. I don't think the peg decreasing the efficiency of the production structure has that great a negative effect. We could look at the extreme for an answer: Say a peg lowers wages to were they are half of what they would be without. Cleanly Chinese labor would be very competitive, and many more would be employed producing cheap gimmicks for export. The production structure would be slightly less efficient, but that does not make up for the greater affordability of labor. More people would be employed. They would all be poorer, and the country as a whole would be poorer, but a greater number of people would be employed.
Wages are set by the productivity of labor. Most of that productivity comes from the available capital stock per worker. With the peg we destroy capital in toto, and so wages do indeed fall, but that is not to mean that employment rises!
Wages fall because, with less capital to go around, the economy need less workers, and will thus lower wages until the surplus workers are done away with. Employment falls and is switched to the unneeded extra capacity in exports, it does not rise.