“Why Chinese mercantilism is lose-lose”

Ok, I don’t disagree with that having the potential for a lose-lose of course – sorry I misinterpreted what you said as discussing QE, as I made the comment with regards to QE.

Slightly better attempt at explaining my view:
1. Portfolio flows on the capital account drive the current account these days. Let’s say Country A manipulates its capital account to get a current account surplus through a complex of regulations we will call financial repression. This drives down the price of A’s currency. A also sterilises the effect of its surplus on domestic money growth.
2. In Country A, the return on capital on a range of possible investments will be pushed down due to lower RER. The supply of investment capital will be pushed out due to financial repression (lack of other uses of capital). Country A will experience investment-led growth, at the cost of consumers (lower share of income, forced saving into low income investments). If the country is smart/lucky enough, productivity will grow fast enough consumers feel better off anyway.
3. In A’s trading partner Country B, production will be pushed down in order to satisfy the accounting identity. In order to avoid mass unemployment, B will be be forced to run looser monetary policy than it would have liked, pushing up debt and asset prices. However, consumers feel rich, take lots of holidays, and life is good. The non-tradeable, capital-lite sector develops. Some economists in Country B suggesting locking in the low interest rates to build some farsighted nation-building projects, but this never happens due to focus group polling telling the government that they would get more electoral traction spending the money on swinging voters.
4. After a while levels of total debt (whether public or private or both) in Country B have got a a level commonly associated with a financial crisis. Country B either has a financial crisis, defaults, or puts up trade barriers.
5. Country A is left sitting on an accumulated capital base much of which was only viable due to subsided rates of return (RER), inflated assumptions of economic growth (infrastructure), subsidies or repressed interest rates.
6. The net outcome is worse for both sides than if Country A had simply allowed its currency to appreciate in the first place.

Certainly those conference papers will help to make the trade-off clearer, although it’s a shame we don’t have a better print media to get the discussion out into a broader domain. I’d like to take up your challenge and try to make an argument that it would be win-win (or damn near) to restructure the economy, but I have to go and eat a goat tagine my wife has cooked 🙂

Why Chinese mercantilism is lose-lose: in short, I think the mercantilist country gets a development boost for a while but eventually your trading partners run out of ability to buy more stuff and you find you have made a lot of malinvestment. That’s the best I can do in one sentence sorry!

I think the principle is a bit different. The goal isn’t to close the S-I imbalance, or to make the cost of capital the same as the US – it is to articulate why these things happen, and what trade-offs they represent.

If our real exchange rate is higher because we have more income transfers and a faster growing population than a number of other developed countries, then the loss of competitiveness is a specific choice we’ve made as a society because we value those things. We can only “fix it” by undoing other policies we support – and we
should be honest about that. It isn’t a problem with a win-win solution, it is a trade-off.

“I agree with your comment that direct manipulation of the currency price by foreign central banks can be a pain in the arse. In my view it’s lose-lose.”

I keep hearing people say that, but I can’t see a single argument about why. And we all agree “demand is too low” … making foreign stimulus a weird “win-win” in that regard. Wondering why do you think it is a lose-lose?

For me, the elephant in the room is that one regime has been conspicuously successful in the OECD and that is Singapore’s. Of course we can “never” adopt it because our interest rates make the cost of carrying reserves too high. And yet … it seems that in the collective brain of the RBNZ/Treasury they actually know roughly what it would take to bring interest rates in line with US levels. It’s possible, it’s just that nobody will come out and say it. Maybe they think they’ll be tarred as mean ole economic rationalists.

There are always issues in kind – and it isn’t the intent of the law, but the outcome that matters. I think we agree on those things. However, when it comes back to this post, my issue is that people aren’t looking at the trade-offs in the first place … and that is frustrating.

I want beer.

Mmm. I think a civilised society is a movement toward privacy, and where a very small state (minarchy), funded voluntarily, is my servant, providing the rule of law, rather than the current state of the surveillance state being my master. A voluntary, free society.

A beer I think. It’s hot here in the Sounds.

Hmmm, I find this distinction just far too absolute – if you use it for government now, the same argument would hold all the way until we have no institutions that influence individual actions left. To me, that shows that there is something missing from the story.

We want individuals to have choice and opportunity, undeniably. But irrespective of the way society is made up these are constrained by the way we interact with individuals. Even if these were the only factors we cared about, I don’t find any conclusions about the way we need to change the state (including in terms of tax) self-evident.

Mmm. Re your last para, yes, I realise I live in the village, however, the ruling ethic is now that the village owns me – that’s a planned society.

Given the rationale that our centrally planned lives via the surveillance state has it’s foundation in tax policy and administration, I disagree with you on the ability to opt out, where it matters.