–Does China need to export as much as it does?

The debt hawks are to economics as the creationists are to biology.

It widely is believed China must continue to increase its exports to maintain its economic growth and to pay its massive population. The desire for growing exports is what drives China’s reluctance to revalue the yuan upward.

But, does China’s economy really rely on ever-increasing exports? China is a Monetarily Sovereign nation. As such it has the unlimited ability to create its own sovereign currency.

Think of what happens when Chinese Factory “A” exports to the United States. Factory “A” receives dollars, a foreign currency it cannot use to pay its workers. So how does Factory “A” pay its workers? It exchanges these dollars for the yuan China creates from thin air.

This means, for every dollar Chinese Factory “A” receives, the Chinese government creates 6.7 yuan (current exchange rate), which it gives to Factory “A” in exchange for U.S. dollars. Factory “A” pays its workers with yuan, created by the Chinese government, while the Chinese government amasses dollars.

The Chinese government can use some of those dollars for international trade (oil purchases, etc.), but many become T-securities held in China’s account at the Federal Reserve Bank. In short, China’s economic growth requires the Chinese government to create yuan from thin air.

If Chinese factories exported less and received fewer dollars, the Chinese government could continue to create and distribute the same number or yuan as now. The only difference: Instead of giving these yuan to its people in exchange for many dollars, it merely would give those same yuan to the people, while receiving fewer dollars.

There would be less accumulation of T-securities at the FRB, a difference that has scant effect on the Chinese worker or on the Chinese economy.

How would the Chinese government give yuan to its people, if it were not exchanging yuan for dollars? Answer: More domestic deficit spending on things like roads, health care, retirement benefits, etc. A case might be made that the Chinese population would be better off receiving salaries for building domestic roads, providing domestic health care, etc., than receiving salaries for creating toys, clothing and other export items of no domestic value.

Without exports, the Chinese government would create about the same number of yuan as it now creates with exports. The entire domestic process would be affected very little. Yes, China can use U.S. dollars for certain imports, but I suspect it already has stockpiled enough dollars for that purpose to last several lifetimes, so the question becomes: Does China need to export as much as it does?

Monetarily non-sovereign nations like the PIIGS, which cannot produce unlimited amounts of money, need to have a positive balance of payments. So the other question is: Why does the U.S., which is monetarily sovereign, want to increase exports?

Rodger Malcolm Mitchell

No nation can tax itself into prosperity

–What will cause the next inflation?

The debt hawks are to economics as the creationists are to biology.

The debt hawks say federal deficit spending will cause inflation. History says they are wrong. There is no post-1971 (end of the gold standard) relationship between federal deficits and CPI. (See: INFLATION) In fact, despite massive deficit spending, the Fed today is most worried about deflation.

Nevertheless, I now believe inflation has become a threat.

In a letter dated October 1, 2010, John Mauldin said:

“John Hofmeister is the former president of Shell Oil and now CEO of the public-policy group Citizens for Affordable Energy. He paints a very stark picture of the future of energy production in the US unless we change our current policies. First, because of the aftereffects of the moratorium. It is his belief that the drilling moratorium will effectively still be in place until at least the middle of 2012. There won’t even be new rules until the end of 2011, and then the lawsuits start.

“Gulf oil production will be down by up to 1 million barrels a day. Imported oil is now 67% of oil usage but will go to 75% by 2012. He thinks crude oil will be up to $125 and gasoline between $4-$5 at the pump. And it will only get worse.

“He describes the problem with the electricity from coal production. The average coal plant is 38 years old, with a planned-for life of 50 years. Our energy production capability is rapidly aging, and we are not updating it fast enough.

“He argues that the fight between the right and the left has given us 37 years without a realistic energy policy, as policy gets driven by two-year political cycles but good energy planning takes decades. There are 13 government agencies that regulate the energy industry, with conflicting mandates that change very two years. There are 22 congressional committees that have some level of involvement and oversight of the energy industry.”

Why is this important for inflation? Because although federal deficits do not correlate with inflation, energy prices do. And if we have the shortages Mr. Hofmeister suggests (a big “if” as oil supply is notoriously difficult to predict), they will translate into higher overall consumer prices. Yes, new oil sources are being discovered daily. And yes, progress is being made in developing alternative energy. But the modernization of huge populations in China, India, Russia and other less developed countries, is sure to increase world oil consumption, massively.

Inflation can be prevented and cured by raising interest rates. But our government is fixated on the false, debt-hawk belief that federal deficits cause inflation. So the political “cure” will be to reduce federal spending and/or to increase federal taxes, either of which, history shows, will devastate our economy.

In summary, the next inflation will come from energy shortages, which the debt hawk government will deal with by causing a recession.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity. There is widespread belief the stimuli didn’t work. I am reminded of the man whose house was burning. His neighbor showed up with a garden hose and actually was able to reduce the flames, but only somewhat. The neighbor wanted to call the fire department, who would bring out the big hoses, but the man told him to stop, because “Obviously, water doesn’t put out fires.”

–Warren Mosler interview: What if China stops buying U.S. debt?

The debt hawks are to economics as the creationists are to biology.

Warren Mosler is that rare individual who is both a successful businessman and an economist. He now is running for the Senate from Connecticut.

Warren has the ability to explain abstruse economic subjects in simple, illuminating ways. Here’s one excerpt from a recent interview. You can read the entire interview at Interview.

(Background: The Chinese buy U.S. T-securities by transferring U.S. dollars (not yuan) from their checking account at the Federal Reserve Bank to China’s T-security account, also at the Federal Reserve Bank. Later, when the Chinese redeem those T-securities, the money is transferred back to China’s checking account at the Fed. During the entire purchase and redemption process, the dollars never leave the Fed.)

Interviewer: “Money the Chinese earn by sending merchandise to the United States are credits in the U.S., and these credit units are nonredeemable, so Chinese owners can do nothing with these things unless they use them to buy American products, and if they do, those units become profits for American firms.

But there is also another possibility, which sometimes raises concerns in the larger public, and this is what happens if China should choose to get rid of these dollars by selling the U.S. securities they own.

While the amount of dollars owned by foreigners doesn’t change, the price of the dollar would in fact decline. If China sells off American debt, dollar depreciation may be substantial.”

Mosler: “Operationally, it’s not a problem because if they bought euros from the Deutsche Bank, we would move their dollars from their account at the Fed to the Deutsche Bank account at the Fed.

The problem might be that the value of the dollar would go down. Well, one thing you’ve got to take note of is that the U.S. administration is trying to get China to revaluate currency upward, and this is no different from selling off dollars, right?

So, what you are talking about (selling off dollars) is something the U.S. is trying to force to happen, would you agree with that?”

Interviewer: “Yes.”

Mosler: “Okay, so we’re saying that we’re trying to force this disastrous scenario—that we must avoid at all costs—to happen.

This is a very confused policy. What would actually happen if China were to sell off dollars? Well, first of all, the real wealth of the U.S. would not change: the real wealth of any country is everything you can produce domestically at full employment plus whatever the rest of the world sends you minus what you have to send them, which we call real terms of trade.

This is something that used to be important in economics and has really gone by the wayside.

“And the other thing is what happens to distribution. While it doesn’t directly impact the wealth of the U.S., the falling dollar affects distribution within U.S., distribution between those who profit from exports and those who benefit from imports.

And that can only be adjusted with domestic policy. So, number one, we are trying to make this thing happen that we are afraid of, and number two, if it does happen, it is a demand-distribution problem, and there are domestic policies to just make sure this happens the way we want it to be.”

So there you have it. All the hand wringing about what happens if China were to stop buying T-bills and instead buy some other country’s money is just a bunch of blah, blah, blah.

The relative value of U.S. dollars, compared with other money, would go down, which is exactly what the Federal government has been trying to effect — foolishly, I might add.

When China or any nation buys T-securities (aka “lends us money”), they must use dollars, and the dollars never leave the Fed.

Even if China were to buy another nation’s debt, using dollars it has earned from exports, the dollars still never would leave the Fed.

Think closely about this process and you will see why federal “borrowing” is a meaningless exercise.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity


— Let’s blame China

An alternative to popular faith

Here we go, again. The typical beggar-thy-neighbor approach to international trade.

6/10/10: By David Lawder; WASHINGTON (Reuters) – Treasury Secretary Timothy Geithner said on Thursday that reform of China’s exchange rate is “critically important” to the U.S. and global economies and a more flexible yuan was in China’s interest.
In his testimony, Geithner said the Obama administration wanted China to change policies that disadvantage American companies and to provide a more level playing field for U.S. products and investments. He vowed the administration would “apply forcefully” all remedies available under U.S. law to curb China’s unfair trade practices, including anti-dumping and countervailing duty complaints.
“A stronger yuan would benefit China because it would boost the purchasing power of households and encourage firms to shift production for domestic demand, rather than for export,” he said. “[…]which is particularly important now, with China’s economy facing a risk of inflation in goods and in asset prices.”


Think of it this way. When two nations each have the unlimited ability to create money, which nation benefits from a positive balance of trade? That is, which nation benefits when one sends more of its goods and services to the other?

In CHINA TRADE we saw that the nation exporting fewer resources (i.e. exporting more, easily created money), has the advantage. The Obama administration seems to believe international trade is a zero-sum game, where for every “winner” (net goods and services exporter) there is a “loser” (net goods and services importer). So in their minds, for the U.S. to be a winner, we must make sure there are enough nations that are losers – as I said, the beggar thy neighbor approach to international trade.

The technical truth is, the U.S. could we wealthy without exporting a single dollar’s worth of goods and services. Visualize that our exports were zero and the U.S. government were the sole “export” customer. Rather than exporting steel, sausage and services, the government would buy all this output. No, don’t get excited. I don’t suggest we stop exporting. I’m just trying to demonstrate a point.

Could the government afford it? Yes, the government has the unlimited ability to create the money to afford anything. Would our industries suffer? No, they would receive the same money as if they actually had exported. Would this increase the money supply to inflationary levels? No, the total money within the economy would be the same as if it had come in from other nations.

Yes, we’d have to solve the problem of what we do with all the goods and services we produce (Create new industries for this purpose??), but the U.S. literally could survive and prosper with no exports at all – as though it were the only nation on earth.

The Obama administration merely has set up China as a straw man, to take the blame for our economy’s failure to grow as fast as it should. But, the real blame should go to the debt hawk belief that federal deficit spending should be minimized. For years, our stimulus efforts have been too-little, too-late, and even today, while growth is painfully slow, and millions are out of work, there is more concern about so-called debt (i.e. money created) than about economic success.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity