Indeed, China's desire to accumulate wealth and its desire to generate a strong export engine of grwoth have undermined each other as was inevitable.
Too many too-large countries with polices of export-led growth, combined with the IMF’s failure to play the role as any kind of FX cop -- those are the ingredients that got us here. If you like it was also market failure – failure by markets that simply assumed they had the price right or that there was an end game to China's export/reserve accumulation gambit. Markets were ‘cool’ with what was going on. Lots of Fx reserves in China, Japan, Taiwan, OPEC countries- no sweat. The sweat came later.
It was wrong to conclude that complacency over the growing size of fx reserves and arbitrary fx pricing (by China) was equilibrium. It was wrong to think anything good was coming of all those trade patterns and stubborn deficits and surpluses. At the very least since
When this sort of TRADE DEPENDENCY happens what else happens?
China did not set out to accumulate FX reserves as much as it set out to have export led growth. The reserves were a by-product,and for a while, an enjoyable one. If
As the principal reserve unit, the US really had no control of these events.
Now China and other exporters are caught in the natural trap of the business cycle. I have no sympathy for countries that pursue aggressive trade expansion then cry FOUL and PROTECTIONISM when demand overseas collapses and they suffer the consequences. What else could they suffer?
I have recently looked at the ratio of imports to GDP and their behavior in this cycle for the US and for a batch of EMU countries and found – interestingly- that the ratios had not fallen so much in recession – not a record drop certainly. The drop off in imports (other countries’ exports) is mainly due to the drop in GDP in importing countries. EVEN IN THE US that is true. The drop in imports relative to US GDP is not that large (i.e. it’s the drops in GDP that have been large and the drops in imports that have moved 'in tandem.'). Of course let’s remember here that import elasticities are greater than ‘unity’ in value. So when GDP drops, imports (others’ exports) drop by more (in percentage terms) as matter of statistical regularity. So if you live off that upside (in good times exports grow faster than GDP) you suffer that ‘exaggerated’ downside in a period of decline- nothing WTO can do about that…
IT'S THE REAL THING...
IT'S THE REAL THING...
Everyone talks as if what is happening is all financial related but it's not IT”
Of course we have to finance our real imbalances. And the imbalances are the real problem, not the financing vehicle, though it plays a role. The idea that switching global monetary policy out of the dollar while these real sector imbalances stay in place is so much
I could go on but I’ll stop here. You get the idea. I think this is a much richer place to go to look for answers about what is going on in the world economy. SDRs are a red herring. If ‘we’ (El Mundo) go off the dollar standard who will run the deficits to permit ‘everyone else’ to have export led growth? How does a shift to SDRs help that?
So what is China really after with its SDR talk? It is simply looking for a way to take US prestige down a notch. It's all about politics and power and trying to get even after something goes wrong. Saving face. It's very Asian.