There were four posts yesterday. The first was “How Much Should We Worry About A China Shock?”:
Suppose that those of us now worried that China’s Ponzi bicycle is hitting a brick wall (or, as some readers have suggested, a BRIC wall) are right. How much should the rest of the world worry, and why?
I’d group this under three headings:
1. “Mechanical” linkages via exports, which are surprisingly small.
2. Commodity prices, which could be a bigger deal.
3. Politics and international stability, which involves some serious risks.
So, on the first: this is what many people immediately think of. China’s economy stumbles; China therefore buys less from the rest of the world; and the result is a global slump. Or, maybe not so much.
Some quick, rough, but I think useful math: In 2011, the combined GDP of all the world’s economies not including China was slightly over $60 trillion. Meanwhile, Chinese imports of goods and services were about $2 trillion, or around 3 percent of the rest of the world’s GDP.
Now suppose that China has a slowdown of 5 percent relative to trend. Imports would fall more than this; typical estimates of the “income elasticity” of imports (the percentage change from a 1 percent change in GDP, other things equal) are around 2. So we could be looking at a 10 percent fall in Chinese imports — an adverse shock to the rest of the world of one-tenth of 3 percent,or 0.3 percent of GDP. Not nothing, but not catastophic.
And even this is arguably an exaggeration, because a significant part of China’s imports are components for its exports,and don’t depend on Chinese domestic demand.
As I said, then, the mechanical links through trade flows are relatively small, although they could bulk much larger for some of China’s neighbors (but would be smaller for the United States).
Commodity prices are a potentially bigger story. China is a major consumer of raw materials — for example, about 11 percent of world oil consumption. And because the supply and demand of commodities tend to be relatively unresponsive to prices in the short run, a sharp drop in Chinese demand could lead to sharp falls in commodity prices. So the Ponzi bicycle shock could be a bigger deal for countries that sell raw materials, whether they sell to China or not, than it is to China exporters.
Finally, politics and international relations. I am obviously no kind of expert here. But it’s obvious, first, that China’s political regime is remarkable, even given the annals of history, for the hypocrisy of its position: officially it’s building the socialist future,in practice it’s presiding over a crony capitalist Gilded Age. Where, then, does the regime’s legitimacy come from? Mainly from economic success. Let that success falter,and then what?
And if you really want to get nervous, think about what cynical governments trying to distract their populace from domestic failures have often done in the past. Saber-rattling over some islands somewhere, anyone?
No particular bottom line here, except that you probably want to focus much more on the indirect effects than on the direct export multiplier.
Oh, and a curious aside. Of course I’ve been reading Michael Pettis, who has been making many of the points I’ve raised for some time. But I’ve had a bit of trouble accessing his work in the past couple of days; as of this morning, I get this:
Consider all jokes about Chinese corruption, stimulus, etc.made.
The second post of the day was “The Unredeemable Opaqueness of the Hard-Money Men:”
Noah Smith notes, correctly, that the current position of the hard-money coalition — now that it seems, after many years of failure, to have mostly given up on predicting runaway inflation — involves a remarkable repudiation of an idea that one might have expected them to hold dear, namely that of efficient financial markets. But I think he fails to convey the full incoherence of the current hard-money position.
Let’s go back to my favorite line from Maestrodamus:
Today’s competitive markets, whether we seek to recognise it or not, are driven by an international version of Adam Smith’s “invisible hand” that is unredeemably opaque. With notably rare exceptions (2008, for example), the global “invisible hand” has created relatively stable exchange rates, interest rates, prices, and wage rates.
The first part of that quote actually conveys pretty well the common creed of all the anti-interventionists out there: the invisible hand is out there, and it knows what it’s doing. Even if you think it looks as if markets are way off, you are a mere mortal who cannot understand the market’s wisdom, which is “unredeemably opaque”. It’s not so much that the market is always right — although “with notably rare exceptions” it is — as that economists and government officials cannot possibly second-guess the market in any useful way.
And yet, you must also believe that this wise market, guided by the invisible hand, can be sent wildly off course if the central bank prints too many pieces of green paper; and not just that, you have to believe that it can be sent wildly off course in a predictable direction.
This contradiction has always been a core peculiarity of the Austrians; but now it is shared by a wide spectrum of right-leaning economists.
Some economists, like Antonio Fatas, demand to see the model that produces such results. But I really think you need to understand this in terms of backward induction. First comes the answer: government action of any kind to fight a slump is bad. Then the search is on for a story to justify that answer, and it really doesn’t matter if the story is inconsistent with everything else you’ve said. (Surely the financial stability argument should lead one to demand very strong bank regulation, and also a highly activist monetary policy to correct those flighty, unreliable markets with their predictable errors).
All in all, we are continuing to learn a lot from this slump, not just about how the economy works, but about how many economists work. Unfortunately, none of the news is good.
The third post of the day was “Orwell, China, and Me:”
I saw that some commenters were puzzled by my throwaway reference, in the context of the Chinese Ponzi wall-hitting bicycle, to the fascist octopus singing its swan song. But that came, of course, from George Orwell’s Politics and the English Language, which anyone who cares at all about either politics or writing should know by heart.
And it occurs to me that the essay is also relevant to a complaint I’ve been getting from a few people, to the effect that I’m being too snide about the Chinese regime. Now first of all, I’m snide about lots of governments, very much including my own — and with reason; nobody has the right to be exempt from deserved ridicule.
But also, folks, while the current leaders of China may not be bad men — I really have no idea — the fact remains that we’re talking about a dictatorship, and one that by all accounts enables epic corruption too. You may say that yes, but look at the economic achievements; but Orwell got there first:
Consider for instance some comfortable English professor defending Russian totalitarianism. He cannot say outright, “I believe in killing off your opponents when you can get good results by doing so.” Probably, therefore, he will say something like this:
“While freely conceding that the Soviet regime exhibits certain features which the humanitarian may be inclined to deplore, we must, I think, agree that a certain curtailment of the right to political opposition is an unavoidable concomitant of transitional periods, and that the rigors which the Russian people have been called upon to undergo have been amply justified in the sphere of concrete achievement.”
Happily, the current Chinese government isn’t that bad; but “not as bad as Stalin” is not, exactly, an inspiring slogan.
The last post of the day was “Single Malts and Science Fiction:”