Made In China – Goods Deflation. Also a Low Neutral Interest Rate?

Adam Tooze piece here inspired me to do a little blogging. 

See chart below.  All that Chinese industrial lending = goods deflation.  China is (still) trying to export its way to prosperity.

This will be a persistent deflationary force until China either gives up or blows up…

Various people (Micheal Pettis especially) pointing out very few countries are able/willing to accept a permanent trade surplus.  But that is what China is (still) trying to run with.  That will hit developing countries and, likely, the US “consumer of last resort.”

A lot of that Chinese industrial lending is going to end up coming our way one shipping container at a time.  Why?  China’s consumers don’t claim a large enough share of national income to consume it.   So the US will continue to run a “permanent” trade and budget deficit.  Just how the math must work.

The Chinese alternative – driving up domestic consumption to absorb that production – would involve an internal income redistribution.  They are unwilling to take on.  That is why Pettis’ book is called “Trade Wars are Class Wars.”  China has a Class conflict that is driving its Trade policy.  Until either the upper classes accept the need to re-distribute income or some other factor forces the issue.

This is also why I am skeptical the global neutral interest rate R* has suddenly moved up.  China’s surplus policies create excess supply and constrained demand on a global basis. That should(?) suppress interest rates, as we saw pre-Covid

That equation eventually gets solved.  Hopefully the damage is mostly contained within China’s mostly-closed financial system.  We’ll see?  At least we’ll get a lot of cheap EVs and fridges out of the trade.

The other country highlighted in Pettis book is Germany.  Their export-led model seems to have finally hit the end of its run.  Not sure how to slot that into the above…,q_auto:good,fl_progressive:steep/,q_auto:good,fl_progressive:steep/


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