露龈笑矫正 上唇过短:謝國忠 : Trade surplus may be fool's gold

Trade surplus may be fool's gold / 謝國忠

Summary

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The rising concentration of money through trade surplus and high business profitability and the flawed recycling of that money through capital market are the source of today's trouble. Today's debt crisis reflects that the losses, made before during the recycling, need be recognized today. Governments that don't want to accept this reality are prolonging the crisis.

For the global economy to function normally, a country shouldn't run trade surplus if it doesn't know how to invest the surplus wisely; a company shouldn't make high profit if it doesn't know what to do with the money; an individual shouldn't save money if he or she doesn't know how to manage the money. Unless one can invest money wisely, the ability to make money is harmful to the world.

Through inflation, asset deflation or defaults, money hoarders will suffer in this decade. It is a logical ending to the rising money concentration in the past two decades.

It takes two to tangle

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Germans complain that Greek are cheaters for doctoring their books to borrow money. China complains of America's debt addiction. But, it takes two to tangle. The Greeks could cheat. And America could borrow. Unless someone is on the other side, one cannot sustain a bad habit.

Globalization has brought different peoples and countries together. They are fundamentally different in rules, values, and institutions. Globalization allows greater manifestation of their differences, because their differences could cancel each other in a global context for the time being.

One of the strongest human desires is to accumulate money for future security or saving for the rainy days. But, money must be spent as a whole. If everyone wants to accumulate, an economy cannot function. Economics solves this problem by assuming that people who work save and retirees spend their savings. There is an interest rate that allows the two to perfectly balance each other.

This model works if people are rational economic beings and the institutions that govern their economies are the same. Such assumptions are far from reality. Some people have far stronger desire for accumulation than others. And such people may concentrate in one ethnic group or country. Globalization will make such people or countries richer than others. Of course, the money must be recycled from the former to the later. Otherwise, the global economy cannot function.

But, if the money is recycled inefficiently to the later, i.e., not building up their ability to make money, crisis is inevitable. As people rarely change, crisis becomes an inevitable phenomenon of globalization.

Euro is the reason for the Eurozone's debt crisis

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Germany accumulated trade surpluses of €1.64 trillion between 2000-10, compared to $1.35 trillion for China and $512 billion for Japan. 79% of Germany's surplus was directly with the EU countries. As China runs a trade deficit with Germany and surpluses with most other EU countries, including such indirect effects, all of Germany's trade surpluses were with other EU countries. It remains so now.

The size of Germany's cumulative surpluses should be similar to the size of sovereign debt problems in other EU countries. Japan demonstrates that, if fully funded with domestic savings, a country could have very high indebtness and remain stable for a long time. When the funding is substantially foreign, the market would start to worry quite early. The foreign component is similar to a country's cumulative trade deficits. For the troubled EU economies it is basically Germany's cumulative surpluses.

The establishment of euro created a new currency environment within the eurozone. The capital market assumed that the member economies wouldn't default under the Stability and Growth Treaty of 1997. Indeed, the market assumed it before the treaty and traded down interest rates in countries like Italy and Spain to the German level. These countries had high interest rates before due to the expectation of their currency devaluation. Within the eurozone this risk seemed gone, and it made sense to bring down their interest rates.

These high interest rate countries of course went on a borrowing binge like consumers seeing a big sale. Even though the Stability and Growth Treaty limited their fiscal deficits, their private sector could borrow. When the eurzone economy was depressed, the deficit limit was violated by virtually everyone. The demand boom due to the borrowing binge was met by imports from Germany. And the later recycled the surpluses into the borrowing countries through its banking system.

It was a ponzi game and continued as long as Germany thought that the others would pay back eventually. The game couldn't go on when the market stopped believing. The mess is really about recognizing the losses that had occurred before. Without the euro these countries couldn't have borrowed so much, and Germany couldn't have run such trade surplus.

The best way out for Germany is for the ECB to print money to monetize the losses. At least it would spread the losses to everyone in the eurozone. If Germany refuses to go that way, the losses from their defaults would mostly end up in Germany. Even though Germany drags it out in handling the crisis, because it wants euro to remain like the Deutsch Mark and the debtors to pay its money back, it will likely choose to sacrifice the former eventually. Euro will not be the Mark but would be an average of the Mark and Lira.

The other Ponzi game

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Germany has been by far the biggest generator of trade surpluses. China, Japan, and oil exporters are the other significant ones. While Germany recycles its surpluses mostly into other eurozone members, China, Japan, and the oil exporters have sunk their surpluses into the US treasury market. This is because their currencies are linked to the dollar, not euro. They earn surpluses mostly from the US. Hence, their surpluses need to go into the US to sustain their exchange rate policy.

The eurozone debt crisis has benefited the US treasury market. The market wouldn't lend to the eurozone countries like before. The funds are diverted into the treasury market. Even though the US's fiscal deficit is higher than all the euro countries in debt trouble, the treasury yields have declined. Hence, they seem to have a better fortune than Germany. But, the dynamic between them and the US is similar to that between Germany and the troubled eurozone economies. The economic model built on trade imbalance is sort of a ponzi game.

Germany's fate today could be China's tomorrow.

Investing wisely first, earning trade surplus second

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If a country cannot invest wisely abroad, it shouldn't earn trade surplus in the first place. Otherwise, it hurts oneself and others. First, it is likely to create a bubble at home, due to the surplus' effect on money supply. Second, it hurts others by fueling their bubbles through making dumb money available. So far, no country with big surpluses has invested wisely.

In a world with two countries, one with higher savings rate would own the other eventually. In reality a sovereign country couldn't be owned by another. It can always nationalize foreign owned companies and default on its foreign debts. Hence, any country that earns big trade surpluses permanently is just not smart. Essentially, all the efforts that go into earning the surpluses would be wasted eventually.

Foreign investment works out only if the other side grows and doesn't mind sharing the upside with the foreign investor. Hence, a surplus country should earn the surplus and invest it in an economy that would grow rapidly. It is rare for both conditions to be met. That is why prolonged imbalance always leads to a financial crisis.

If China wants to continue its trade surplus against the US, it must invest the money in such a way to help the US grow. Investing in treasuries wouldn't get there. Government spending is just not that efficient. I believe that China should switch into the US stocks to improve the chance of sustaining the economic relationship with the US. The money in the stock market would be used by companies that would likely grow the US economy.

Otherwise, a sluggish US economy inevitably leads to the Fed printing more and more. Even though the US government will pay back its debt, the investors would receive dollars of significantly lower value.

Money hoarding leads to bubbles

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Money cannot stop. It has to circulate. When a group of people or a country accumulates lots of money, it will be recycled to someone who is willing to spend it. The accumulated money would be a piece of paper that shows the former as a shareholder or creditor in the later. As argued before, sustained trade surplus leads to bad investments in the other side, creating demand through bubbles.

Hence, if one wants to hoard money, one should be a very good investor. For example, Warren Buffett deserves to hoard lots of money, because he can invest the money productively, i.e., it grows the economy more than his share from his investment return. It is the same story for a country. When a country runs big trade surpluses continuously, it must ask if it can be Warren Buffett.

Skewered Money distribution keeps the economy down

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The global economy is double dipping. Financial markets are panicking, wiping out about $10 trillion in market value this month. You can bet that many pundits would propose numerous options to revive the global economy. None would work, because they all try to boost demand temporarily. The problem with the global economy is that the ones with money don't want to spend it, and the ones who want to spend money don't have it.

This dilemma applies to the relationship between (1) countries with trade surpluses and deficits, (2) households that are wealthy and poor, and (3) cash rich companies and unemployed workers. There is plenty of money in the world. The low interest rates attest to it. Its distribution is just too skewered for the global economy to function properly. Adding more money couldn't solve it.

The corporate sector, for example, is cash rich in most economies. Unemployment rate is high in the same economies. If the former is bearish and doesn't invest, the expectation is self-fulfilling, as the high unemployment keeps the economy weak. Globalization has led to rising income and wealth inequality. The inequality is such that some people just cannot spend more, while the rest don't have money even for necessities. The impact of the imbalance between countries was discussed before. Essentially, when rising money concentration continues for a decade or two, the economy will inevitably get into trouble. It cannot be fixed through stimulus.

The troubled global economy will eventually rebalance itself by destroying paper wealth and redistributing it to the masses. It happens through (1) defaults, (2) asset deflation, (3) inflation, or (4) taxation. The global economy encountered a similar challenge in the 1930s. Different countries went about their own ways to rebalance. Germany used hyperinflation. The US went through asset deflation and debt defaults.

I believe that the consequence of the current debt crisis is inflation and negative real interest rate for years to come, while asset prices would be stagnant or declining. The inflation will ease the pressure on debtors over time. They could spend more again at some point. I don't know how long this process would last. It may take a decade.