my take-away from the michael pettis piece attached is that
(i) china will do what china wants regardless of external pressure
(ii) so either external pressure de-pressurizes of own realization of impossibility of moving china, or
(iii) the apple cart will flip and china shop shatter
(iv) above will determine diaper deflation now or diaper deflation later after hyper inflation now
place our bets.
one realistically viable win-win bet independent of hyper/diaper in/de flations
all knowable as well as unknowable news discounted and the faith is at 1362 / 1365
but there is no market excitement because hardly anyone is participating, and because the wager is dirt cheap relative to shares and bonds
gold is troubling me
folks seem to be worried about a 150 correction
i am fussed about the possibility of a 50 overnight ramp
Michael Pettis:
mpettis.com
SNIP:
So what will China do?
This, for me, is the most interesting and perhaps important question. Most probably Beijing will do the same thing Tokyo did after the Plaza Accords and Beijing did after the renminbi began appreciating in 2005. It will lower real interest rates and force credit expansion.
This of course will have the effect of unwinding the impact of the renminbi appreciation. As some Chinese manufacturers (in the tradable goods sector) lose competitiveness because of the rising renminbi, others (in the capital intensive sector) will regain it because of even lower financing costs. Jobs lost in one sector will be balanced with jobs gained in the other.
But there will be a hidden cost to this strategy – perhaps a huge one. The revaluing renminbi will shift income from exporters to households, as it should, but cheaper financing costs will shift income from households (who provide most of the country’s net savings) to the large companies that have access to bank credit. So China won’t really rebalance, because this requires a real and permanent increase in the household share of GDP. Instead what will happen is that it will reduce Chinese overdependence on exports and increase China’s even greater overdependence on investment.
This will not benefit China. It will fuel even more real estate, manufacturing and infrastructure overcapacity without having rebalanced consumption. Expect, for example, even more ships, steel, and chemicals in a world that really does not want any more.
So we are still pretty much stuck. China and other surplus countries like Germany and Japan need to understand that their policies are causing real damage in the US, and the US needs to understand that the surplus countries simply cannot adjust fast enough to suit the US, but neither side is very interested in understanding the other.
An optimal solution will require real grown-up behavior on the part of the major economies, who must agree to resolve the trade imbalances carefully and with determination. Of course grown-up behavior is probably too much to ask from countries that have displayed so little of it to date. Instead trade relationships will simply continue to deteriorate.
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