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starbucks4ever (94.15)

Export: Keynesianism

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October 06, 2010 – Comments (11)

I am surprised so few people realize that America's main export product is not legal services, Barbie dolls or even software. No, its main export product is Keynesian services of market-making, that is, making a market for consumer goods other countries need to dispose of. 

The way it works is this: Asian tigers live in the classical capitalist world of the 19th century that was described by Marx. As a result, because their leaders never read Keynes, they just let everyone do with his money as one pleases and predictably, wages stayed at subsistence minimum while the enormous surplus value accrued to the capitalists who hadn't a slightest idea how to sell the millions of IPods produced to people working for a bowl of rice a day. We all know how this works out in an isolated country: either the elites refuse to change and the classical Marxist crisis of overproduction takes the economy back to stone age (cases in point: entire Africa, Latin America, poorest parts of Asia, and now Russia), or they open Keynes's book, tax themselves progressively, and work together on restoring aggregate demand (cases in point: USA, Western Europe, Canada, Israel, Australia, and New Zealand).  

But for better or worse, the Asian tigers can postpone this choice because they are not isolated. And this is where America comes in. America has made the right choice long ago so now it no problems with aggregate demand: American proletarians will happily consume as much as you let them to. And the Asian ruling classes are like our extreme right-wing Republicans: clinging to every yuan squeezed from their workers and their paranoid greed won't allow them to let go of at least some of these yuans even when logic tells them that this small sacrifice would make them much richer than they are now. So they sit on their pile of unsold goods, victims of their own greed, and agonize over their choice, unable to sell them and still unable to help their consumers buy them. They are so desperate that if some Chinese peasant offered them yuans which they knew were probably counterfeit they would still accept it as payment, just as long as it would help them move the inventory and then they would hope to unload the counterfeit yuans on someone else. But unfortunately, Chinese peasants are very financially conservative and won't consider this thing, which Chinese capitalists crave subconsciously but refuse to admit it even to themselves. And the pile of unsold goods grows.

Enter America. It tells the Chinese: "We'll purchase your pile, and we'll pay you with a hundred billion USD which I printed yesterday". The boneheaded Chinese capitalists scream with delight, hug and kiss the new-found consumer, and jail their lone dissident economist who tells them to inspect these paper bills more closely. They don't want to inspect these bills because they are too afraid to face the conclusion such an inspection would bring. And because they all choose to keep trading with their eyes wide shut, the improbable trick works. And what it the result of this? They have arrived at the very same Keynesianism which they so loudly detested. But because they were both too greedy and too stupid to manufacture Keynesianism at home, they had to import it from abroad. And in the grand scheme of things it doesn't matter much, if you consider Chimerica as a single entity.

But if you consider China separately and America separately, you must see this outcome in a different light. Because imported Keynesianism is not the same thing as domestically grown one even if it helps keep the factories running. The difference is that the American consumer has occupied the place that could and should belong to the Chinese consumer in the same way as the cuckoo offspring that get a free ride in other birds' nests. The US trade deficit with China to the tune of $250 B annually gives you the value of Keynesian services rendered. 

If the Chinese Central Bank took the $250 B it uses every year to purchase Treasury paper and used it instead to purchase the cargo intended for export just before the boat left Shanghai, and distributed the stuff among its peasants for free, the end result would be exactly the same, plus some money would be saved on shipping expenses.

11 Comments – Post Your Own

#1) On October 06, 2010 at 10:11 AM, rofgile (99.42) wrote:

Brilliant!  I love this.

One point of thought -

 If the Chinese government just bought up their goods and distributed them locally - it would mean printing currency.  Their currency would lose value relative to others.

 By running a US trade deficit with China, we are going into debt.  And since our currency = debt tokens, we are printing currency to do this.

 As Chinamerica - US dollar falls and we print.  China alone - China yuan falls and they print.

 So there is a difference.  The difference is who prints and who builds the debt. 

 Best economic world scenario is that China pushes consumerism (hopefully of a good, environmentally possible form - homes, electric cars, solar panels, energy efficient appliances..) to its people and their lives improve.  The west helps supply these and other goods to a more open market in China.  The trade deficits balance out, and all sides win from the exchange - with the Chinese people winning the most from improved quality of life (and us all for having a sustainable economic relationship).  Wouldn't that be peachy?

 Zloj, did you hear that China is going to send a probe to the moon?  Pretty soon there will be a manned mission to the moon from China (I am betting within 15 years).  This will be an important moment for the world.

 -Rof 

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#2) On October 06, 2010 at 10:35 AM, mtf00l (48.04) wrote:

Eh...

China has been around for a long time.  Don't count your consumers before they buy.

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#3) On October 06, 2010 at 10:43 AM, starbucks4ever (94.15) wrote:

rofgile,

Trade equilibrium is always better for the exporter that working for paper. However, for the importing country - it is not as certain. Most Americans would win in the long run from a return to sanity, but some would lose big, and the ones who lose are also the most influential. So the US will keep this arrangement for as long as it can.

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#4) On October 06, 2010 at 11:22 AM, russiangambit (29.38) wrote:

Love the post. it deserves wider distribution than just the Foll website. Many macroeconomic theories are behind the times and therefore fail to predict the outcome correctly. For example, flooding the markets with liquidityb in the develioped world leads to liquidity flowing to emerging markets and creating inflation there instead of stimulating home economies (Shtiglitz point from yesterday). But the mainstream economist are still hell bent on getting QE2. Fior what purpose?

Americans are like a spoiled child, nothing is ever enough, they always want more without much thought given to where goodies are coming from. And when they don't get somthing they throw an aimless temper tantrum.

The goodies are coming from China and at some point there will be a pay back.

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#5) On October 06, 2010 at 5:08 PM, FracturedVision (< 20) wrote:

I exported all my Keynesianism because its broken and doesn't work - Austrian economics and principles of sound money are what brought America to prosperity through the 19th century and what will again.

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#6) On October 06, 2010 at 8:34 PM, starbucks4ever (94.15) wrote:

And yes, to answer your comment 

"If the Chinese government just bought up their goods and distributed them locally - it would mean printing currency.  Their currency would lose value relative to others."

They print yuans anyway to purchase dollars from exporters, which dollars then end up invested in Treasury paper. So the same amount of printing will take place as is taking place now. 

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#7) On October 08, 2010 at 3:05 AM, Valyooo (99.43) wrote:

Zloj, even though I don't always agree with you, I enjoy your blogs (in this case I do agree with you, and I do many other times, but not always).  Your blogs are clever and well though out though.

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#8) On October 10, 2010 at 4:28 PM, FreeMortal (29.38) wrote:

OP: If the Chinese Central Bank took the $250 B it uses every year to purchase Treasury paper and used it instead to purchase the cargo intended for export just before the boat left Shanghai, and distributed the stuff among its peasants for free, the end result would be exactly the same, plus some money would be saved on shipping expenses.

China Central Bank requires an inflow of dollars from the US in order to buy treasuries.  These dollars come from China's exports.  If China bought the cargo before it left port, then wouldn't the inflow of US dollars drop by that amount? At that point, where will the additional treasuries come from?

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#9) On October 10, 2010 at 4:42 PM, starbucks4ever (94.15) wrote:

FreeMortal,

China already has enough $$$ to keep this going for 10 years. After that it could leave half of the cargo for itself and export the other half.  

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#10) On October 10, 2010 at 4:44 PM, starbucks4ever (94.15) wrote:

Or simply run a trade deficit. America does it, why can't China do the same?

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#11) On October 12, 2010 at 12:28 AM, FreeMortal (29.38) wrote:

I'm not sure it will be easy for China to do as we do for they are not even close to where we are (although their “stock” appears to have a lot of headroom).  If China ran a trade deficit, then they would be consuming more than producing which results in a negative effect on GDP.  If GDP (per capita) were high enough to allow for a huge service sector, then maybe they could pull it off.  I'm not convinced they are prepared to do so any time soon, maybe in 20 years.

Exporting Keynesism is a fascinating idea, but the analogy is a bit strained. Keynes sought to fight unemployment in a depression by raising aggregate demand from the source of last resort, government spending.  But to make a subsistence economy into an industrialized one is, I believe, a different problem than the one Keynes was trying to solve.  One is priming a big sputtering pump, the other is building a bigger pump.

The use of "Keynesism" here looks like a substitution for the notion of aggregate demand, which can be raised in numerous ways.  China effectively raised demand through liberalized trade. 

 

Here's how I see the story:

The boneheaded Chinese capitalists found a lush new market in the USA and were very pleased to exchange their production for the wonderful US dollar.  Well, the glamour eventually wore off a bit and the boneheaded capitalists decided it was time to use those dollars to do the thing that all of us boneheaded, Foolish, capitalists want to do: invest.  Because they made so much profit from using Chinese labor to feed US demand, the boneheaded capitalists wanted to invest in even more infrastructure in China.  To do this they had to exchange currency with the bank. 

The bank also loved the wonderful US dollars but they too could only sit and stare at them so long, eventually they had to do what banks do: make money with them.  They can't directly invest in China with US dollars, if they we were going to do that, they would effectively be a dollar-driven economy.  As you mentioned, Chinese tend to be more financially conservative, and the thought of turning China over to the dollar is understandably frightening.  An easier alternative (and conservative, investment wise) was to use those US dollars to buy US treasuries. 

Now they've bought nearly a trillion dollars' worth of treasuries and China now looks ever more like a dollar-driven economy anyway.  I'm not sure this was the intention when they started the practice.  But maybe the Chinese really had this game all figured out thirty years ago and everything is going according to plan.  mwahahahahaha

 

There is a correlation between the monetization of US debt by the Chinese Central Bank and the increase in aggregate demand, but monetization was an effect of US demand, not the cause.  The demand was already there.  Permitting trade with the US consumer released the demand, monetization was the result.

Keynes’ solution was fiscally oriented, this monetary solution invokes a different frame: Since the Chinese Central Bank was going to print money anyway, why not simply drop money from, um, autogyros and let the Chinese peasants boost aggregate demand themselves?

China could boost demand this way (if they can convince the Chinese to spend it rather than save), at least for the short-run.  But what is their goal?  Are they trying to resolve a crisis? Are they trying to prime a sputtering pump choked from liquidity, or are they trying to build a bigger pump?  Can you just keep priming the pump (fiscally or monetarily) and get sustained growth?  Eventually, the marginal cost of debt per yuan of earnings would get too much. 

The rapid growth is much more easily attributable to the opening of trade.  Monetary policy was a result of that.

 

I had no idea my reply would be so long-winded.  Sorry.  I don't type much on blogs, so consider it a compliment.

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