Comments on: What should have been discussed during the SED meetings (Part 1) http://mpettis.com/2009/08/what-should-have-been-discussed-during-the-sed-meetings-part-1/ China's financial and monetary links to the world Tue, 16 Mar 2010 08:11:36 -0500 http://wordpress.org/?v=2.8.6 hourly 1 By: China’s Domestic Demand: What’s the Hold Up? « Patrick Chovanec http://mpettis.com/2009/08/what-should-have-been-discussed-during-the-sed-meetings-part-1/comment-page-1/#comment-3210 China’s Domestic Demand: What’s the Hold Up? « Patrick Chovanec Fri, 21 Aug 2009 13:13:56 +0000 http://mpettis.com/?p=940#comment-3210 [...] economic observers, including myself, see it as necessary to correct an unsustainable imbalance in the global balance of savings and consumption.  Time magazine even speculates, in a recent cover story, that China might be able to “save [...] [...] economic observers, including myself, see it as necessary to correct an unsustainable imbalance in the global balance of savings and consumption.  Time magazine even speculates, in a recent cover story, that China might be able to “save [...]

]]> By: John Ross http://mpettis.com/2009/08/what-should-have-been-discussed-during-the-sed-meetings-part-1/comment-page-1/#comment-3004 John Ross Fri, 14 Aug 2009 07:45:29 +0000 http://mpettis.com/?p=940#comment-3004 Bcg81 Thank you for having independently done the calculations and verifying that the trends for US government spending are as I stated. I can easily explain the small numerical difference between your results and mine – and the identical trend. The US BEA national accounts main aggregates table 1.1.5 line 21 which you refer to includes together government investment and government consumption under ‘Government consumption expenditures and gross investment’. Dividing this by GDP (line 1) gives exactly the figures and trend you indicate. The change that needs to be made is that the US is highly unusual in putting together in its GDP main aggregates table government consumption and investment - almost all countries merely list government consumption under the equivalent line. To remove the government investment element it is necessary to use table 1.5.5 which lists investment in Federal Defence (line 53), Federal Non-Defence (line 56) and State and Local (line 59). If you subtract these from the figures in line 21 you will come up with my numbers. The reason you find the same trend but slightly different numbers is that government expenditure is massively dominated by consumption and not investment – in the second quarter of 2009 government consumption was 17.0% of US GDP and government investment 3.6% of GDP. Therefore there was an identical trend. For those who want to check the other calculations, personal consumption is in line 2 of BEA table 1.1.5 and can simply be divided by the GDP figure. This shows US personal consumption, as well as government consumption, also clearly rising as a percentage of US GDP – Q4 2007 69.9%, Q2 2008 70.3%, Q2 2009 70.6%. It is slightly frustrating to have to state all this without charts as these show immediately that consumption has been rising as a proportion of US GDP but the comments sections here doesn’t accept charts. The relevant charts can however be found on my <a href="http://ablog.typepad.com/keytrendsinglobalisation/" rel="nofollow">blog</a> - which contrary to the suggestion of JohnT in a comment on Micheal Pettis’s next post very much exists. As Bcg81 has independently corroborated the figures I produced I hope it should now be accepted that it is established that consumption has risen as a proportion of US GDP and not fallen as Professor Pettis stated. Bcg81
Thank you for having independently done the calculations and verifying that the trends for US government spending are as I stated.
I can easily explain the small numerical difference between your results and mine – and the identical trend. The US BEA national accounts main aggregates table 1.1.5 line 21 which you refer to includes together government investment and government consumption under ‘Government consumption expenditures and gross investment’. Dividing this by GDP (line 1) gives exactly the figures and trend you indicate.
The change that needs to be made is that the US is highly unusual in putting together in its GDP main aggregates table government consumption and investment – almost all countries merely list government consumption under the equivalent line. To remove the government investment element it is necessary to use table 1.5.5 which lists investment in Federal Defence (line 53), Federal Non-Defence (line 56) and State and Local (line 59). If you subtract these from the figures in line 21 you will come up with my numbers.
The reason you find the same trend but slightly different numbers is that government expenditure is massively dominated by consumption and not investment – in the second quarter of 2009 government consumption was 17.0% of US GDP and government investment 3.6% of GDP. Therefore there was an identical trend.
For those who want to check the other calculations, personal consumption is in line 2 of BEA table 1.1.5 and can simply be divided by the GDP figure. This shows US personal consumption, as well as government consumption, also clearly rising as a percentage of US GDP – Q4 2007 69.9%, Q2 2008 70.3%, Q2 2009 70.6%.
It is slightly frustrating to have to state all this without charts as these show immediately that consumption has been rising as a proportion of US GDP but the comments sections here doesn’t accept charts. The relevant charts can however be found on my blog – which contrary to the suggestion of JohnT in a comment on Micheal Pettis’s next post very much exists.
As Bcg81 has independently corroborated the figures I produced I hope it should now be accepted that it is established that consumption has risen as a proportion of US GDP and not fallen as Professor Pettis stated.

]]> By: bomlat http://mpettis.com/2009/08/what-should-have-been-discussed-during-the-sed-meetings-part-1/comment-page-1/#comment-2981 bomlat Thu, 13 Aug 2009 11:00:55 +0000 http://mpettis.com/?p=940#comment-2981 Pei. China mixing the issues of Yugoslavia , the problems of the US during the great depression ,Germany before the 2nd world war and russia after the system change. So,the outcome could be many thing,but there is more chance for nasty thing than for good things. And I think that even this 30 million has same chance ,and each day that pass without a direction change the chance going up slightly. Pei.
China mixing the issues of Yugoslavia , the problems of the US during the great depression ,Germany before the 2nd world war and russia after the system change.
So,the outcome could be many thing,but there is more chance for nasty thing than for good things.

And I think that even this 30 million has same chance ,and each day that pass without a direction change the chance going up slightly.

]]> By: shawn http://mpettis.com/2009/08/what-should-have-been-discussed-during-the-sed-meetings-part-1/comment-page-1/#comment-2959 shawn Wed, 12 Aug 2009 19:34:15 +0000 http://mpettis.com/?p=940#comment-2959 I'll try to restate the problem with the Prof's analysis of savings. its a simple error really, everyone makes it but the Prof should not ignore Ross' very earnest comments. Savings rate vs savings level "If China continues to pump out capacity and tries to export this excess abroad, and if US household savings rise much more quickly than US fiscal dis-saving (borrowing), we will almost certainly see the bad case scenario occur, at least in China, and especially if it leads to trade friction around the world." Household savings rates have increased sharply – but this has little bearing on whether total levels of savings have risen or fallen. If total household income has fallen by X%, and household savings rates increase by less than X% (we all have to eat, even if we start eating Chinese takeout), then savings has fallen, not risen. The argument also overlooks public sector debt and spending, which has famously run into unprecedented deficit. I’ll try to restate the problem with the Prof’s analysis of savings. its a simple error really, everyone makes it but the Prof should not ignore Ross’ very earnest comments.

Savings rate vs savings level
“If China continues to pump out capacity and tries to export this excess abroad, and if US household savings rise much more quickly than US fiscal dis-saving (borrowing), we will almost certainly see the bad case scenario occur, at least in China, and especially if it leads to trade friction around the world.”

Household savings rates have increased sharply – but this has little bearing on whether total levels of savings have risen or fallen. If total household income has fallen by X%, and household savings rates increase by less than X% (we all have to eat, even if we start eating Chinese takeout), then savings has fallen, not risen. The argument also overlooks public sector debt and spending, which has famously run into unprecedented deficit.

]]> By: bcg81 http://mpettis.com/2009/08/what-should-have-been-discussed-during-the-sed-meetings-part-1/comment-page-1/#comment-2911 bcg81 Tue, 11 Aug 2009 14:26:36 +0000 http://mpettis.com/?p=940#comment-2911 For what it’s worth, it seems to me the US GDP data from the BEA does say what Prof Ross says it does. I could not calculate the same ratio of government consumption/GDP (dividing line 21 of BEA Table 1.1.5 by line 1 of that table = 19.2% Q4 2007, 19.8% Q2 2008, 20.7% Q2 2009), but the direction (increasing as % of GDP) and magnitude (~1 percentage point) were the same according to my calculations. I’m also not sure I agree with Michael’s statement above that “private debt is dropping faster than public is rising”. The latest (Q1 2009) Z.1 Flow of Funds, for example, shows a net decrease in private debt of $116.8 billion and a net increase in government debt (state/local govt, federal govt and GSEs) of $402.4 billion. Granted the data as of today may look different. (If I’m missing something, please correct me.) More importantly, though, I think the reason the government is borrowing is that it anticipates private debt dropping via repayment and default by a lot more, and for a long time. And that’s the larger point, I think. As TR says, and as I’ve always understood Michael’s argument, we’re not talking about a process that was completed between the first two quarters of 2009, but one that has been triggered, has multiple paths and will play out over years. If Michael's right about the consequences of the choices policymakers face, we'll see it in the data inevitably; I'm not sure how much it matters that we don't see it yet and think it kind of misses the point to use that a basis for accusations of mis-stating the facts. Also, Michael has always warned against (including in this post) a scenario in which government debt-fueled government consumption replaces consumer debt-fueled personal consumption in the US-China (im)balance - an argument that seems well-aware of the distinction between government and personal consumption rather than confusing them. For what it’s worth, it seems to me the US GDP data from the BEA does say what Prof Ross says it does. I could not calculate the same ratio of government consumption/GDP (dividing line 21 of BEA Table 1.1.5 by line 1 of that table = 19.2% Q4 2007, 19.8% Q2 2008, 20.7% Q2 2009), but the direction (increasing as % of GDP) and magnitude (~1 percentage point) were the same according to my calculations.

I’m also not sure I agree with Michael’s statement above that “private debt is dropping faster than public is rising”. The latest (Q1 2009) Z.1 Flow of Funds, for example, shows a net decrease in private debt of $116.8 billion and a net increase in government debt (state/local govt, federal govt and GSEs) of $402.4 billion. Granted the data as of today may look different. (If I’m missing something, please correct me.) More importantly, though, I think the reason the government is borrowing is that it anticipates private debt dropping via repayment and default by a lot more, and for a long time.

And that’s the larger point, I think. As TR says, and as I’ve always understood Michael’s argument, we’re not talking about a process that was completed between the first two quarters of 2009, but one that has been triggered, has multiple paths and will play out over years. If Michael’s right about the consequences of the choices policymakers face, we’ll see it in the data inevitably; I’m not sure how much it matters that we don’t see it yet and think it kind of misses the point to use that a basis for accusations of mis-stating the facts. Also, Michael has always warned against (including in this post) a scenario in which government debt-fueled government consumption replaces consumer debt-fueled personal consumption in the US-China (im)balance – an argument that seems well-aware of the distinction between government and personal consumption rather than confusing them.

]]> By: Houhui http://mpettis.com/2009/08/what-should-have-been-discussed-during-the-sed-meetings-part-1/comment-page-1/#comment-2852 Houhui Mon, 10 Aug 2009 17:49:41 +0000 http://mpettis.com/?p=940#comment-2852 I don't mean to join a debate that I wasn't originally in here John Ross, but as far as i knew, Prof Pettis was talking about the future (5 years or more?) when talking about consumption in the US falling as a portion of GDP. I personally don't see how the US can continue importing / borrowing as much as had previously been occuring. The downward pressure on the dollar was already intense. At the moment we are still in a transition phase (ie within 18 months of the shock). I would not expect new patterns to be emerging quite yet, at the moment everyone is still reacting. From a banking perspective, i think certain truths need to be acknowledged. 1 - the lending in China this year has been extreme and at the very least strongly influenced by politics, rather than commercial viability. I am not one who thinks that the banks (despite all their Chinese board members senior figures being party members) are totally slaves to government will, and i also think government will has some contradictions, but truth is simple - no policy, no lending. 2 - It is not sustainable. I expect the July figures to be the lowest or perhaps around the levels of April and May this year, which I think reflects policy level ideas that agree that it is not sustainable. August will almost certainly be low too, whether or not Sept sees an end of Q spike is still a question... 3 - Keeping the RMB pegged to the dollar has had large costs in terms of sterilization over the last few years - especially with degrading dollar returns on the reserves. Had the crisis not removed the need to sterilize so much, and the corrections taken away the trend (for months at least) then around this year or next the burden of this would have become very hard. - In fact i personally believe that without this crisis and the reintroduction of the peg, the rate of appreciation of the RMB would have increased this year. Aside from this, there seems to be a problem with the idea that China's trade surplus and (connected or not) undervalued currency (and over-production etc - which you may not agree with) is a result of some sort of magic formula. We know what happens if everyone tries to devalue in a competitive way, we also know that not everyone can logically run a trade surplus. Trade tension is bound to arise, and i think we have proof that it already is doing so. I would reiterate Greg's point? If you dismiss all the imbalances / correction arguments, then what exactly do you see the world looking like in 5 years? I don’t mean to join a debate that I wasn’t originally in here John Ross, but as far as i knew, Prof Pettis was talking about the future (5 years or more?) when talking about consumption in the US falling as a portion of GDP.

I personally don’t see how the US can continue importing / borrowing as much as had previously been occuring. The downward pressure on the dollar was already intense.

At the moment we are still in a transition phase (ie within 18 months of the shock). I would not expect new patterns to be emerging quite yet, at the moment everyone is still reacting.

From a banking perspective, i think certain truths need to be acknowledged.

1 – the lending in China this year has been extreme and at the very least strongly influenced by politics, rather than commercial viability. I am not one who thinks that the banks (despite all their Chinese board members senior figures being party members) are totally slaves to government will, and i also think government will has some contradictions, but truth is simple – no policy, no lending.

2 – It is not sustainable. I expect the July figures to be the lowest or perhaps around the levels of April and May this year, which I think reflects policy level ideas that agree that it is not sustainable. August will almost certainly be low too, whether or not Sept sees an end of Q spike is still a question…

3 – Keeping the RMB pegged to the dollar has had large costs in terms of sterilization over the last few years – especially with degrading dollar returns on the reserves. Had the crisis not removed the need to sterilize so much, and the corrections taken away the trend (for months at least) then around this year or next the burden of this would have become very hard. – In fact i personally believe that without this crisis and the reintroduction of the peg, the rate of appreciation of the RMB would have increased this year.

Aside from this, there seems to be a problem with the idea that China’s trade surplus and (connected or not) undervalued currency (and over-production etc – which you may not agree with) is a result of some sort of magic formula. We know what happens if everyone tries to devalue in a competitive way, we also know that not everyone can logically run a trade surplus. Trade tension is bound to arise, and i think we have proof that it already is doing so.

I would reiterate Greg’s point? If you dismiss all the imbalances / correction arguments, then what exactly do you see the world looking like in 5 years?

]]> By: matt http://mpettis.com/2009/08/what-should-have-been-discussed-during-the-sed-meetings-part-1/comment-page-1/#comment-2844 matt Mon, 10 Aug 2009 11:35:24 +0000 http://mpettis.com/?p=940#comment-2844 Prof. Pettis: "US consumption must grow more slowly than US production and the US trade deficit will narrow, except in the very unlikely case that US investment soars – investment would have to grow faster than savings to keep the trade deficit from contracting." Why is a very unlikely case that investment soars in the United States? It seems to me that the U.S. government is trying very hard to subsidize residential investment, which is a large portion of investment in the United States. With the administration planning such large deficits, much of which will find itself in the "investment" category, I don't think it is far-fetched to think that investment growth can outpace savings growth (at least in the intermediate term). Prof. Pettis:

“US consumption must grow more slowly than US production and the US trade deficit will narrow, except in the very unlikely case that US investment soars – investment would have to grow faster than savings to keep the trade deficit from contracting.”

Why is a very unlikely case that investment soars in the United States? It seems to me that the U.S. government is trying very hard to subsidize residential investment, which is a large portion of investment in the United States. With the administration planning such large deficits, much of which will find itself in the “investment” category, I don’t think it is far-fetched to think that investment growth can outpace savings growth (at least in the intermediate term).

]]> By: John Ross http://mpettis.com/2009/08/what-should-have-been-discussed-during-the-sed-meetings-part-1/comment-page-1/#comment-2840 John Ross Mon, 10 Aug 2009 08:49:18 +0000 http://mpettis.com/?p=940#comment-2840 TR, I am not remotely nitpicking but dealing with an absolutely central part of Michael Pettis’s argument. Michael Pettis claims that consumption in the US is <a href="http://mpettis.com/2009/06/china%E2%80%99s-savings-problem-and-the-consumption-constraint/" rel="nofollow">falling</a> and that this has a number of major consequences for the world economy and for China. He then constructs a theory of what will be the consequences of such a fall in US consumption for the world economy and for China. In other words he argues if A then it follows that B, C etc. But I point out that such a fall in consumption as a proportion of US GDP has not factually taken place, therefore consequences can’t flow from it. In other words A is not true. That isn’t to ‘nitpick’ it is to show that one of the most central arguments is wrong. Michael Pettis has the great virtue that he is looking at the key developments of the financial crisis affecting China not from the point of view of silly trivial explanations which cannot explain economic shocks of this magnitude (it is due to excessive bonuses to bankers etc) but from the point of view of the most important macro-economic trends in the world which are indeed powerful enough to explain what is occurring. The problem is that the macro-economic trends he claims have happened haven’t actually happened. Michael Pettis has argued consumption has been rising as a proportion of GDP in the US and saving has fallen under the impact of the financial crisis. I point out that in fact the opposite has occurred. That is, as I said, the first premise of Michael Pettis’s argument doesn’t hold. I note that neither TR nor others making similar points, or Michael Pettis, have attempted to refute the facts that I set out in my comment - they will not be able to because the trends I have outlined are the ones actually occurring. After a period of time when these points are not answered people should conclude that the facts as I have set them out are correct, and the statements made regarding the factual trends in the US economy made by Michael Pettis are wrong. Michael Pettis has attempted to set out a coherent theory of what is happening in the US economy and how this is affecting China. He has done so in a logically interconnected fashion. That is well worth discussing. The problem is the theory doesn’t accord with the facts. The theory that the sun went round the earth was also <i>logically</i> coherent – it just wasn’t true. Once the real factual trends have been established then the reasons, and their consequences for China, can then be discussed. Professor Pettis may wish to try to refute the facts I set out regarding the US economy – if not people are justified to conclude the facts are the ones I have set out not those he has claimed. Hopefully he will accept that the facts are as I have set out and then the discussion can deal with the trends that are actually taking place. TR,
I am not remotely nitpicking but dealing with an absolutely central part of Michael Pettis’s argument.
Michael Pettis claims that consumption in the US is falling and that this has a number of major consequences for the world economy and for China. He then constructs a theory of what will be the consequences of such a fall in US consumption for the world economy and for China. In other words he argues if A then it follows that B, C etc.
But I point out that such a fall in consumption as a proportion of US GDP has not factually taken place, therefore consequences can’t flow from it. In other words A is not true. That isn’t to ‘nitpick’ it is to show that one of the most central arguments is wrong.
Michael Pettis has the great virtue that he is looking at the key developments of the financial crisis affecting China not from the point of view of silly trivial explanations which cannot explain economic shocks of this magnitude (it is due to excessive bonuses to bankers etc) but from the point of view of the most important macro-economic trends in the world which are indeed powerful enough to explain what is occurring.
The problem is that the macro-economic trends he claims have happened haven’t actually happened. Michael Pettis has argued consumption has been rising as a proportion of GDP in the US and saving has fallen under the impact of the financial crisis. I point out that in fact the opposite has occurred. That is, as I said, the first premise of Michael Pettis’s argument doesn’t hold.
I note that neither TR nor others making similar points, or Michael Pettis, have attempted to refute the facts that I set out in my comment – they will not be able to because the trends I have outlined are the ones actually occurring. After a period of time when these points are not answered people should conclude that the facts as I have set them out are correct, and the statements made regarding the factual trends in the US economy made by Michael Pettis are wrong.
Michael Pettis has attempted to set out a coherent theory of what is happening in the US economy and how this is affecting China. He has done so in a logically interconnected fashion. That is well worth discussing. The problem is the theory doesn’t accord with the facts. The theory that the sun went round the earth was also logically coherent – it just wasn’t true. Once the real factual trends have been established then the reasons, and their consequences for China, can then be discussed.
Professor Pettis may wish to try to refute the facts I set out regarding the US economy – if not people are justified to conclude the facts are the ones I have set out not those he has claimed. Hopefully he will accept that the facts are as I have set out and then the discussion can deal with the trends that are actually taking place.

]]> By: MoneyIllusionist http://mpettis.com/2009/08/what-should-have-been-discussed-during-the-sed-meetings-part-1/comment-page-1/#comment-2839 MoneyIllusionist Mon, 10 Aug 2009 08:38:14 +0000 http://mpettis.com/?p=940#comment-2839 Prof Pettis, At least,I think Ross has asked a good question here.The whole savings rate problem is really too abstractive,at least for me..Hey,there even hasn't been a definition for it. US consumption/GDP rate hasn't been coming down this year.Steven Roach has mentioned this: http://multimedia.caijing.com.cn/2009-06-25/110189317.html Prof Pettis,

At least,I think Ross has asked a good question here.The whole savings rate problem is really too abstractive,at least for me..Hey,there even hasn’t been a definition for it.

US consumption/GDP rate hasn’t been coming down this year.Steven Roach has mentioned this:

http://multimedia.caijing.com.cn/2009-06-25/110189317.html

]]> By: Jeff http://mpettis.com/2009/08/what-should-have-been-discussed-during-the-sed-meetings-part-1/comment-page-1/#comment-2837 Jeff Mon, 10 Aug 2009 08:31:12 +0000 http://mpettis.com/?p=940#comment-2837 Pei, In some ways, aren't brains and belief mutually exclusive? Pei,

In some ways, aren’t brains and belief mutually exclusive?

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