Tuesday, August 25, 2015

China and secular stagnation

So in the last couple of weeks the Chinese problems have been in the news. And many suggest that the troubles in the US are not unrelated. For example, the New York Times tells us that according to Larry Summers: “The risks of a deflationary, secular stagnation in the US would be increased by a large devaluation of the renminbi.” And Krugman resuscitates Bernanke's global savings glut as the explanation for everything, from China's slowdown, depreciation and stock troubles to the recent turbulence in Wall Street.

I will not discuss again the problems with that view. In Krugman's favor he suggests that the "ideology of austerity, which has led to unprecedented weakness in government spending, has added to the problem." It is not that it added to it, it is the problem. But in all fairness, set aside the drama in the financial press, the Chinese stock market should not be a problem for China's long term growth, since losses in domestic currency can always be compensated by their central bank. And China increasingly grows as a result of domestic markets, which are expanding, with real wages still going up, and migration to the cities also helping.

The devaluation of the yuan certainly has consequences, but the problem isn't the effects on US exports, and weaker markets here. That the US could grow with an export-led strategy doesn't pass the laugh test. The US will continue the very slow recovery, and the recent Wall Street problems will have a negligible effect on consumer spending. Yes financial markets are still unregulated and that is dangerous.

But the real problem now, as discussed (whole book is worthwhile) a while ago when commodity prices had not yet fallen significantly by Franklin Serrano, is that a devaluation of all peripheral currencies, as it has been going on in recent times, would have a negative impact on commodity prices. That would be the supply side mechanism, rather than the demand (Chinese, in particular) one. And that might have negative consequences for commodity exporters.

On the positive side, this turbulence suggests that the Fed is very unlikely to hike the rate of interest in the next meeting. That's not enough to produce a stronger recovery in the US, but it might be sufficient to preclude a global debt crisis in the periphery.

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