Friday 19 December 2008

Will China, Germany and Japan cause the Depression of 2009?

"Mercantilism, which reached its height in the Europe of the seventeenth and eighteenth centuries, was a system of statism which employed economic fallacy to build up a structure of imperial state power, as well as special subsidy and monopolistic privilege to individuals or groups favored by the state. Thus, mercantilism held exports should be encouraged by the government and imports discouraged."

The current trend in the soundbite political discussion of the current economic crisis is that it is all the USA's fault and to a lesser extent the UK's fault. We have had too much easy money and built up too much debt, created asset bubbles and ruined our own economic prosperity.
What is often overlooked is that it takes two to tango. Much of the money has been lent to the US/UK by those who seek to export their goods whilst seeking a high current account themselves. The three biggest culprits for this are China, Japan and Germany. All have employed policies which seek to boost export demand whilst not worrying about their own internal demand. This has created a lopsided world economy. Similar in a way to the 1930's - but then it was America who was the large exporter to the world and Germany was the main debtor country; oh, the irony!
China in particular has huge export subsidies to its industries, a controlled exchange rate to the Dollar financed by buying US government debt and a myriad of other taxes and charges which have aimed to build up its own industry. This 'competition' has destroyed the manufacturing base of the UK and US. Germany and Japan are also guilty of this, but using high-technology instead of low.
However, China and the other states now also face a terrible dilemma. Manufacturing is collapsing as fast as banking across the world as demand dries up. To stimulate demand in the deficit countries the Mercantilists' need to provide funds to their export markets; only now there is a big risk the money sent will not return home with the same value that it used to have.
In many ways, the Mercantilist countries have more to lose if international trade collapses.
Apologies for the long post, but the above needs considering carefully. Other countries are complicit in our mess, despite their high-handed speeches now.
In the 1930's the US decided to go the route of protectionism to try and maintain its industries. This had the opposite effect to that which was intended and the US suffered the worst meltdown of all the advanced countries. Deficit UK came off the gold standard and muddled through with much less damage.
If China continues to peg the Yuan to the Dollar (which hammers the biggest consumer of all too, the euroland countries), refuses to do more to stimulate demand and continues with export subsidies then the world WILL face a new Depression.

I have hope that the next G20 meeting will come to a new world trade agreement, that alone would ensure that we do not return to the 1930's.


Old BE said...

Yup we need to avoid the mistakes of the 20s and 30s, I don't fancy fighting the Chinese.

We need to fight recession with free-market capitalism not national socialism.

Anonymous said...

I've wondered for some time whether China might be playing a World Takeover game - long term. From what I understand the Chinese think in terms of centuries rather than decades. I wouldn't be surprised to see China ruling the world by 2050.

Unknown said...

The more I look at the world trade system, I realise that Government distortions and interference are what bugger up capitalism.
If China had a floating currency, those FX reserves would have been recycled faster, increasing US inflation and interest rates. Cheap money would not have fueled the bubble.

Anonymous said...

Yes the penny is dropping! They are the opposite cheek of the same arse!

China is worst since it has taken what little money it has made out of the West over the last 20 years and hidden it under the mattress, instead of returning it by buying US As I've said before, this is almost certainly in the hope of using US $ in the future to try and stave off a massive demographic problem caused by bumping off all the little baby girls which will leave China with huge numbers of old men and no young-uns to look after them.

Germany though, is also surprisingly complicit. Watch for Q2 2009 when I expect to see some really big German companies to fail with the situation being really dire by 2010. Can't believe they aren't putting enormous pressure on the ECB to get interest rates down and therefore revalue the currency to more competitive levels. I've noticed that modern Germans like leaders that "play it cool". Problem is that "cool" might not cut it in the current climate.

Mark Wadsworth said...

What Blue Eyes says.

The terrible thing is, although protectionism is the first refuge of the headline grabbing politician, is not is exclusively left or right wing*, they are all as bad as each other.

* A bit like the myths that VAT is a "tax on consumption so it doesn't discourage production" or that "we have to keep house prices as high as we can, which precludes having a tax on location or bubble values".

Sebastian Weetabix said...

The Chinese are absolutely out to screw us round-eyes. I've visited the place >30 times (indeed, I lived there for 2 years) and I found them to be both pathologically entrepreneurial &, I'm sorry to say, untrustworthy. I learned that nobody wins in China except the Chinese.... you think you are going to a low cost mfg location & what you discover is massive corruption, IP theft, totally arbitrary exercise of government authority & extra hidden costs that wipe out any chance you had of making profits.

They have a long term game plan. They want to own the world's industrial base, control as much of the raw materials as they can, and build their military so they can face down the US & become the dominant power. They think in terms of decades and they are patient... they push, push, push until you resist & then say "so sorry" and step back. They wait a bit & they have another crack at you, this time pushing a little further.

Just watch... the next steps will be to stimuate their domestic demand with some of their cash pile & they will probably also lower the value of the Yuan against the dollar. Why? Because they see an opportunity to kick what is left of our mfg base into the grave.

Those who think mfg doesn't matter, and R&D/design/services are the important bits of the economy are in for a rude shock long term. Once you own the mfg base (q.v. the Japanese consumer electronics business or the Taiwanese silicon wafer manufacturers) after 10-20 years you can own the "clever" bits too. These people are not dumb. We, however, are. Our twat politicians don't even seem to grasp the fact that this is happening.

lilith said...

I have a young friend working in China who has a top language degree from Cambridge and is fluent in 5 languages. He is paid shit and is always the last to sit down at company do's. They want what they can get from our brightest and best, not out brightest and best themselves. They have plenty of their own bright and best thank you very much.

Andreas Paterson said...

Thing about that narrative is that the relation between the protectionism proposed in Smoot-Hawley and the depression is one that isn't that clear cut. Although S-H raised tarriffs, the rise was not necessarily execptional in terms of historical tarriff levels for the US. There is the question as to whether the fall in world trade was due to protectionism or more just a symptom of the depression itself.

Admittedly, I agree with much of what your saying, there's no doubt that the imbalance between the thrifty merchantilist nations and the debtor nations is at the heart of the current mess. I would argue however that the merchantilist approach of these countries has brought us some fantastic new technologies and done a lot for the quality of life of huge numbers of people in China.

As for what needs doing, Germany, Japan and China need to follow policies that stimulate their domestic demand debtor nations need to be encouraging exports, if that means some form state encouragement, so be it in my book./

Sebastian - Interesting take on China, although not all of it seems surprising. I'd agree with your point on manufacturing, I've never taken the idea of the knowledge economy all that seriously.

Electro-Kevin said...

The shift of power from Caucasia (white European culture) to Asia.

What will America do when it sees it's on the cusp of being overtaken by a culture so at odds with what it stands for ? Just let it happen ?

Yes. It IS vitally important to keep the key technological bases at home. Those who say we can survive as a 'service' economy are wrong.

Anonymous said...

Last time I checked, I did not notice we were forced to take any of their imports, whether Chinese, German or whatever.

The fact that we produced crap goods probably helped a lot more.

Quite interesting to see that economies who were more clever than us can be deemed responsible for our problems nowadays.

Anonymous said...

Oh dear, here we go again the "yellow peril".

I'm struggling to think of just one thing that WAS manufactured in the UK but where the manufacturing has now shifted to China. All the manufacturing that currently goes on in China was shifted out of the UK LONG ago. I see my wife has a lot of clothing made in China - but previously it was made in India and Sri Lanka, not here.

If you take the company I work for I have been complicit in moving production to China... from Mexico. Big deal. Also we moved some production to China because it is actually cheaper to employ some Chinese peasant than to get a robot to do the job. They make a load of tat that no-one would buy unless the Chinese could make it absolutely dirt cheap. You can get a Chinese DVD player for £14 in Tesco. A UK company wouldn't even be able to source the raw materials for that! As our consumption of tat comes to an abrupt end they are now having real problems with companies going bankrupt, people going back to the country to return to peasantry and riots in the streets.

As far as the knowledge based economy in China is concerned you can forget it. You end up employing three times as many people thus three times the size of office space and three times as much equipment and software licences because of the high staff turnover. I've never seen anything useful come out of it yet. I'm convinced it is nothing more than a (failed) ruse to try and push down white collar wages in the West. Those idiots have been spying on the US for donkeys years and their space program is still 50 years behind. Quite an achievement. Anyone that has the smarts in China gets themselves a job at a Western company and applies for citizenship elsewhere.

As for the Chinese army taking on the US, forget it. They struggled to keep the US at bay in Korea despite the US having to support their army from across the Pacific whilst the Chinese had a billion people to draw on from their own doorstep. What would they do, nuke the US? That would make sense. 1billion Chinese that can't even feed themselves deciding to nuke the earths most productive food nation.

Sackerson said...

Robin Williams said that when he gave up cocaine, he was afraid his dealer would kill him.

CityUnslicker said...

I disagree about the importance of manufacturing for its own sake. Of course a country should have a diverse economic base. Toom uch focus on financial services has not done us any good recently.

However, there are other things to contribute to a global economy.

As for yellow peril. You have missed my point entirely. The post is about mercantilism and the problems it caused, both in the 1930's and now. Nothing to do with what country does it; just the huge distortion it makes to global trade imbalances.

Also, it HAS harmed our manufacturing base. The chinese did subsidise their industry so that it could be competitive with ours, as did Japan, Korea and even Germany. If they had not done this then the US and UK would not have deindustrialised so quickly. It is obvious when you think about it. China is now wrecking the euro areas by pegging itself to the falling dollar - this is direct government policyintervention not just some racist theory on my part.

Finally, it takes two to tango. other countries who some have said are 'cleverer' than us are soon to see the error of their ways. When we cannot buy their goods their factories will close and we will all be in the same position. The world has been distorted by excess demand; caused by both sides.

Sackerson said...

CU, I think we should turn our eyes, not on the Depression, but how things will look afterwards. The East will generate demand as it aspires to the lifestyle we used to enjoy, and meantime we have been allowing them to transfer the means of production to their co-prosperity sphere. So the Chinese factories will re-open, perhaps after some of the light industry has relocated to Thailand, the poorer parts of India, and other neighbouring regions? And I shouldn't discount India as potentially the real industrial powerhouse of the 21st Century, while China scrabbles about annexing territory for extra lebensraum, water and wood.

Anonymous said...

I just found this article by chance. Upon reading it I started laughing. I teach European modern history. What you guys are talking about (mercantilism, the yellow peril, Chinese plans for world domination etc.) is rather pathetic coming from people whose country practices world domination, outsources manufacturing jobs by choice, floats the Euro, subsidize industry and agriculture heavily, attacks Iraq for oil, had Wolfowitz to control the world bank, pushed free market militarily without practicing it, screwed the world with securities based on dishonest lending policies, covered its losses with Saudi money, sent missionaries everywhere on earth, sucked the brains of third world countries, Europe and Russia. You are accusing Chine, Japan and Germany of doing the evil things that you are still doing. You sound like sour losers to me. I bet you are all white, Republicans, middle class with no real power but to think that private internationals really are patriotic. You are being screwed by the same capitalism you are trying to save. Keep your big words to your selves, I did grade so many of your papers in my classes it just makes me sick (both stupid and pedantic). Try first to save the educational system that's graduating you first.

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