Tuesday, January 11, 2005

Andy Xie of Morgan Stanley thinks renminbi revaluation in 2005 is about as likely as Brad and Jennifer living happily ever after.
Under either international political pressure or internal inflationary pressure, China may revalue the currency in line with market expectations (say, by 15�25%). Such an approach is likely to lead to a hard landing as the massive amount of hot money flows out to realize profits. Commodity prices would fall sharply as a result, and the dollar would strengthen. China would immediately suffer deflation as falling commodity prices and excess capacity cause prices to decline. Since this scenario makes little sense for China overall, I give it a 10% probability.
China is the largest contributor to the US trade deficit (-$131.1bn in goods so far in 2004, or net 25% of the overall goods deficit), so don't expect much in the way of trade deficit reduction this year. In light of a new report by the EPI's Robert Scott for the US-China Economic and Security Review Commission, we shouldn't be expecting much in the way of job growth, either.
Between 1989 and 2003, the growth in US exports to China created demand that supported 199,000 additional US jobs. In the same period, the growth in imports displaced production that could have supported an additional 1,659,000 jobs . . . As a result, growth in the US trade with China eliminated a net 1,460,000 domestic job opportunities in this period. These estimates include both the direct and the indirect effects of changes in trade flows on employment. . . .

. . . the economy has operated well below potential output since 2001 because total employment growth has failed to keep up with growth in the working-age population. In this environment, the persistence of large and growing trade deficits has had a depressing effect on the overall level of employment, as well as its distribution across major sectors of the economy.
So what does 2005 promise? Asset bubbles, lackluster job growth, and the continued erosion of any US export base with which to address the trade deficit. At least we can all rest easy because the National Review informs us that neoclassical economic theory is God-given.
the U.S.�s trade deficit with China . . . has occurred alongside a trading relationship that continues to grow, and which by definition continues to enrich both parties.
Funny how those Ricardian assumptions about balanced trade and money as a veil become accurate descriptions of the "real world" a few hundred years later.


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