Andy Xie, our renowned Chinese economist, opines that money can’t buy growth. And here’s why:
The global economy was a debt bubble, functioning on China over-borrowing and investing and the West over-borrowing and consuming. The dynamic came to an end when the debt crises exposed debt levels in the West as too high. The last source of debt growth, the U.S. government, is coming to an end, too, as politics forces it to reduce the deficit. When the West cannot increase debt, China doing so is not effective on growth and could trigger yuan devaluation.
The US and developed economy:
Globalization has changed how a national economy works, even one as big as the United States’. The biggest change is that national policies can’t affect wages. They are internationally determined. When a government tries to stimulate with more fiscal spending and lower interest rates, its short-term effect, if any, is to increase capital income. As technologies become more effective in spreading work around the world, the wage squeeze in the developed economies would become more intense.
The technology shock to the white-collar economy in the West is just beginning. It makes it easier to shift white-collar jobs around the world and eliminates even more jobs. The resulting efficiency gain is hard to realize if the displaced workers cannot find alternative employment quickly. The labor market statistics in the West strongly suggest the importance of this force. In the United States, the labor force has shrunk because, I believe, many found the available wage not worth the bother. These dropouts are better off shifting to pensions or disability benefits. The only way to bring them back into the labor force is to cut the cost of living to make the low wage worthwhile.
I believe that the developed economies must make their labor market highly flexible, income redistribution efficient, and non-tradable components of the living cost – housing, health care and education – low and effective. This is a simple prescription. But it takes time to produce benefits and could upset vested interests in many industries. The easy way out is to print money, hoping that the pie would grow to take care of everyone. This has failed and will do so again.
China’s competitive advantage is its labor cost. It is the reason for China’s growth in the past decade. But, the system has been allocating the fruits from growth through asset inflation. It is disproportionately in favor of the government. One effect is to increase investment beyond what a normal market economy would allow. The system essentially sucks in the labor productivity gains into the government through inflation tax. It has worked because the pie was expanding fast enough to withstand this burden. As the pie stops growing quickly, the inflation tax is hard to collect. This is why the property bubble is deflating and the government is short of money.
So many who have benefited from the system long for the return of yesterday. The policy focus so far is to change perceptions through propaganda, hoping to revive asset markets. The problem is that China cannot put on this show alone. While the West suffers debt crises, China cannot crank up exports to charge up an asset bubble. The bad news is obviously not acceptable to those who are used to easy bubble money. China’s policy focus is likely to remain on changing perceptions in 2013.
The Inflation Explosion
Trying to bring back yesterday through monetary growth will eventually bring inflation, not growth. Emerging economies are already experiencing high inflation. Historically they worry about inflation, but don’t do much about it as long as their exchange rates are stable. India is already facing devaluation. It is taking inflation more seriously. Other big emerging economies don’t face the same pressure. They are not taking action. Their exchange rates will tumble when the Fed raises interest rates.
The developed economies have low inflation rates because their labor markets are depressed and their economies are mostly about labor costs. Their inflation will come when either their labor markets tighten up due to declining labor force or imported inflation raises inflation expectation and wage demand. Both forces are intensifying. The Fed has promised to take action when the United States’ inflation rises above 2.5 percent. It was 2 percent last year. In 2014 it would break through the level. The Fed has to raise interest rates in 2014.
Dr Andy Xie 謝國忠 is Shanghai-based independent economist specialising in China and Asia. He is currently director of Rosetta Stone Advisors and of China Boqi Environmental Science and Technology. He is also a guest columnist for the South China Morning Post and New Century Weekly.
Dr Xie is one of the few economists who has accurately predicted economic bubbles including the 1997 Asian Financial Crisis and the more recent subprime meltdown in the United States. He joined Morgan Stanley in 1997 and was Managing Director and Head of the firm’s Asia/Pacific economics team until 2006. Prior to that he spent two years with Macquarie Bank in Singapore, where he was an associate director in corporate finance. He also spent five years as an economist with the World Bank.
Dr Xie earned a PhD in economics in 1990 and an MS in civil engineering in 1987 from the Massachusetts Institute of Technology.
Full article at Caixin.
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