264 replies to this topic

[brightness]

No. Most governments simply order the peg rate and throw those who disobey the order into prison.

You are not talking about currency peg, but old soviet/Chinese style currency control. Prisons have never deterred a black market . . . if anything, the threat of prisons only exacerbate the free-market (black market) exchange ratio because the entrepreuers have to take into account the extra cost of doing business (bribing officials)

In fact, the way China pegging the currency is very special. It created enormous tension within China's own financial system. Only a big country with free market and a highly centralized financial system can do that in such a long time.

Not really. Many countries engage in fixed peg to the US dollar . . . it's simply a form of dollarization.

US used to peg dollar to an artificially low gold price. That's why dollars were eventually forced off its gold standard.

The gold price was not artificially low initially. Then the US government lost the discipline that was required to maintain a currency peg. Think about this for a moment, what is accused of Chinese government now is that they have too much monetary discipline and not printing enough money to drive down the real value of the Yuan to match their target peg ratio . . . does that accusation make any sense at all? Since when is a government "too disciplined"?

Agree. GDP was invented to give the state sanction to tax(inflation is also a hidden tax). But the most ridiculous thing about GDP is

1) it counts spending and doesn't care where the money come from.
2) it doesn't count saving.

GDP = private consumption + gross investment + government spending + (exports − imports)

See, there is no place for savings in the equation. If a company does their accounting this way, it will get bankrupt within a month.

Savings is reflected in the "gross investment" (and government spending, if saving takes the form of buying government bonds). The problem with GDP is not in lack of "savings" entry but in its use of "gross." Economics is about economizing and optimizing; all the "gross" entries in GDP/GNP attempt to mix up wheat with chaff and call it "agro output." Goods and service prices in the private sector have a modicum of meaning because the prices are set in a competitive (relatively) free market place; goods and services produced in the government sector has no real price competition, hence the prices do not reflect anything.

IMHO, the real size of the economy should be:
all (competitive market set) wages + all (competitive market derived) profits - all government spending
In the most benign view of government, all government spending is a form of insurance . . . and as we know insurance is a form of cost in production, hence has to be subtracted from (pre-tax) profits if not already.

Not that doubt you. It would help to give some statistics.

http://www.bloomberg...er=MDRMNAPR:IND

Congressmen are politicians. They have to follow the rules of politics or they will be punished. And that's not necessarily economically wise.

There is a risk of blaming the foreigners when economy gets tough, I will grant you that. However upsetting the international trade apple cart would be devastating to all concerned, especially American living standards. Americans have prospered precisely because of being the center of world trade as the result of a relative lack of trade restrictions. Free trade is its own reward; protectionism never pays.

[Howard Fu]

The gold price was not artificially low initially. Then the US government lost the discipline that was required to maintain a currency peg. Think about this for a moment, what is accused of Chinese government now is that they have too much monetary discipline and not printing enough money to drive down the real value of the Yuan to match their target peg ratio . . . does that accusation make any sense at all? Since when is a government "too disciplined"?

I'm not saying they are not disciplined. The currency exchange control of China has a very high cost. That's all I said.

Savings is reflected in the "gross investment" (and government spending, if saving takes the form of buying government bonds). The problem with GDP is not in lack of "savings" entry but in its use of "gross." Economics is about economizing and optimizing; all the "gross" entries in GDP/GNP attempt to mix up wheat with chaff and call it "agro output." Goods and service prices in the private sector have a modicum of meaning because the prices are set in a competitive (relatively) free market place; goods and services produced in the government sector has no real price competition, hence the prices do not reflect anything.

Not all savings become investment.

IMHO, the real size of the economy should be:
all (competitive market set) wages + all (competitive market derived) profits - all government spending
In the most benign view of government, all government spending is a form of insurance . . . and as we know insurance is a form of cost in production, hence has to be subtracted from (pre-tax) profits if not already.

Government spending can be productive, but rarely productive as the private sector.

The fault of government spending is the money has to come from taxing other more productive sectors.

Remember the famous joke about Wang Anshi？How to change a lake to farmland? Drain the water. Where to put the water? Dig another lake. The economics today might be in a state similar to physics before energy conservation law discovered. People devoted great energy and time to invent perpetual motion machines. Similarly, now many economists believe the government can actually create wealth out of thin air by manipulating money around or adding a gadget here or there. From Wang Anshi to Keynes, from New Policy to New Deal, these real smart people fall for this trap again and again.

There is a risk of blaming the foreigners when economy gets tough, I will grant you that. However upsetting the international trade apple cart would be devastating to all concerned, especially American living standards. Americans have prospered precisely because of being the center of world trade as the result of a relative lack of trade restrictions. Free trade is its own reward; protectionism never pays.

Yeah, that's right. But most people believe only big corporate benefit from free now.

[brightness]

I'm not saying they are not disciplined. The currency exchange control of China has a very high cost. That's all I said.

What exists in the Chinese monetary system is not currency exchange control but a currency peg. There is a huge difference between the two, as explained previouisly.

Not all savings become investment.

Not sure what you are trying to say. One person's saving is just his/her way of deferring investment/consumption decision to someone else in exchange for the interest payment.

Government spending can be productive, but rarely productive as the private sector.

The fault of government spending is the money has to come from taxing other more productive sectors.

Remember the famous joke about Wang Anshi？How to change a lake to farmland? Drain the water. Where to put the water? Dig another lake. The economics today might be in a state similar to physics before energy conservation law discovered. People devoted great energy and time to invent perpetual motion machines. Similarly, now many economists believe the government can actually create wealth out of thin air by manipulating money around or adding a gadget here or there. From Wang Anshi to Keynes, from New Policy to New Deal, these real smart people fall for this trap again and again.

Very well said. IMHO, those "smart people's" primary talent is in selling an idea to the public. It's the public's gullibility to "something for nothing" perpetual motion machine (i.e. breaking energy conservation law) that's at the root of the problem. What did they say, politics is about possibilities; i.e. in the business of making the impossible sound plausible??? LOL

Yeah, that's right. But most people believe only big corporate benefit from free now.

The irony is of course that a more free trade system would allow smaller businesses to participate in international trade . . . whereas the big corporations are the ones that can afford the overhead to navigate through the protection barriers.

[Howard Fu]

What exists in the Chinese monetary system is not currency exchange control but a currency peg. There is a huge difference between the two, as explained previouisly.

Currency peg it is, as you said.

Not sure what you are trying to say. One person's saving is just his/her way of deferring investment/consumption decision to someone else in exchange for the interest payment.

You might save your money at home, then it's not equal to investment. Of course, most people save their money in banks. Banks may not lend out all their money. That's why not all savings become investment.

Very well said. IMHO, those "smart people's" primary talent is in selling an idea to the public. It's the public's gullibility to "something for nothing" perpetual motion machine (i.e. breaking energy conservation law) that's at the root of the problem. What did they say, politics is about possibilities; i.e. in the business of making the impossible sound plausible??? LOL

I don't know what's about Wang Anshi, but I believe Keynes had some personal reasons. Keynes lost almost everything in the big crush of 1929. As a famous economist, he took it as a big shame. He surely was a real smart guy. He invented a whole economic theory to prove it was the market's fault not his. His idea about financial crisis is the market sometimes stops functioning irregularly and nobody can predict that, so the government is needed to prevent things get out of hand. That was not the case. Hayek predicted the crush of 1929. Peter Schiff predicted the 2007 one. I predicted it too, if you believe me. Nobody familiar with Austrian economics should be surprised by what's happening now.

The irony is of course that a more free trade system would allow smaller businesses to participate in international trade . . . whereas the big corporations are the ones that can afford the overhead to navigate through the protection barriers.

Interesting point. I never thought of it before.

[Howard Fu]

double

Edited by Howard Fu, 05 November 2009 - 08:16 AM.

[Borjigin Ayurbarwada]

I did not want to respond at all with this time wasting debate as CHF has degenerated so much that it has little academic value left especially with threads like these. But after reading it again, why not?

Are you saying then if Japanese silver went through Ryukyus (an independent Kingdom at the time of Ming) or going through Chinese pirates, then they were not "Japanese silver"? IIRC, Ryukyus thrived as the middlemen during Ming . . . and many of Qi JiGuang's "WoKou" were actually Chinese smugglers.

BTW, Manila Galleon's did not reach China directly . . . guess what, it reached Manila . . . then it was up to the middlemen to reach China. Some of the Seville Merchants (and Portugese merchants when Portugal became part of Spain for a time) may actually reached China directly with Spanish silver. Yes, Seville was not a separate country, but the commerce center of Spain, in case there's any confusion.

No, I don't understand why Japanese silver going through Ryukyus should not be considered silver from Japan. I do not understand your brand of economics at all.

Whether or not the silver from Ryukyu is called Japanese silver or Ryukyu silver is completely irrelevant to the issue of economic power. Its as irrelevant as whether Mexican banana that came from Canada should be called Mexican or Canadian banana. Grasp the point. Any product, including money, could only be used as an instrument of economic power if a state could coerce another to compel to its needs by cutting the trade. Therefore silver from places not part of the Spanish Empire is simply irrelevant to Spanish power. Especially since Spain has no control over such a trade, and its own prosperity depends on such a trade.

The scale of Song international trade was shown by the vast trading centers built up all along Chinese coast, especially in places like QuanZhou . . . the large number of foreign merchants arriving and living in China. Where are these in Ming?

I've already went over it, pay attention. External trade at this time is far inferior to internal trade in volume. And even in external trade there are far more ports than just Quan Zhou, newer trading ports such as Amoy and Macao became much more bustling. And you still shown no sources whatsoever on the volume of trade of Song compared to Ming.

I'm quite skeptical of heresay econometric studies that assert superior trading volume but leave few trading establishments behind.

All I see is a weak attempt at upholding a baseless claim on your part, a claim which you still have no academic sources whatsoever to back up . Thats all I need to know.

A "source" 100-200 years after fact is not first-hand witness, to most people. I have no idea what "first-hand" means in your brand of economics or history. Shopping around for hearsays to bolster one's argument is a waste of time.

Its not an afterfact, it was a primary source recorded by the Jesuits who observed it first hand. You on the other hand don't even have hearsay as a basis for your claim, your claim rests entirely on worthless intuition on your part, thats just pathetic.


And I'm sorry but the rest of your meaningless strawman arguments is completely irrelevant and will be deservedly ignored.

[brightness]

You might save your money at home, then it's not equal to investment. Of course, most people save their money in banks. Banks may not lend out all their money. That's why not all savings become investment.

That's what most people think. I have recently found a flaw in that logic (intoning my best impersonation of Greenspan; LOL). See, under a sound money system, savings under one's mattress just means investing in the monetary commodity. In a fiat money system, saving under one's mattress just means letting the government "invest"/spend the money for you without causing inflation; i.e. fiat money system's ability to steal from the "mattress savings accounts." The more people put under mattresses, the more the government can print away with impunity . . . that seems to be Keynes' big idea, in a nutshell. LOL. Your money is not your money, and your cash savings is not your cash savings . . . it's all linked to the other paper pile through the ether, in a fiat money system.

I don't know what's about Wang Anshi, but I believe Keynes had some personal reasons. Keynes lost almost everything in the big crush of 1929. As a famous economist, he took it as a big shame. He surely was a real smart guy. He invented a whole economic theory to prove it was the market's fault not his. His idea about financial crisis is the market sometimes stops functioning irregularly and nobody can predict that, so the government is needed to prevent things get out of hand. That was not the case. Hayek predicted the crush of 1929. Peter Schiff predicted the 2007 one. I predicted it too, if you believe me. Nobody familiar with Austrian economics should be surprised by what's happening now.

I was shorting home builders starting in 2005; when I talked about the housing bubble and coming collapse at the Memorial Day BBQ that year, some family relatives looked at me as if I had gone nuts. LOL. I wasn't even a card carrying Austrian yet back then. IMHO, Keynes just wanted to sell books and get government tenure. His "General Theory" was more of a post-facto apologia for policies that had already been put in place by Japan, Italy, Germany and the US. The cravenness was shown in the introduction to the German edition of his book: he actually wrote a totalitarian system would be able to implement his policy "suggestions" better than a Western Democracy would.

Interesting point. I never thought of it before.

I too had that moment of epiphany when I was guided to examine economic topics in detail on the level of individual actors . . . for example, GM supported the unions in the early 50's because the union work rules and benefits were effective ways to shut out smaller competitions as GM had the economy of scale and could absorb the overhead cost to deal with the myriads of new regulations whereas a smaller and more innovative new car maker would not be able to. Examined at that level, one has to come to the conclusion that bureaucratization of a society can only serve to tilt the field in favor of the big incumbents at the expense of new and smaller (would-be) challengers . . . eventually stymie the society itself.

[Howard Fu]

That's what most people think. I have recently found a flaw in that logic (intoning my best impersonation of Greenspan; LOL). See, under a sound money system, savings under one's mattress just means investing in the monetary commodity. In a fiat money system, saving under one's mattress just means letting the government "invest"/spend the money for you without causing inflation; i.e. fiat money system's ability to steal from the "mattress savings accounts." The more people put under mattresses, the more the government can print away with impunity . . . that seems to be Keynes' big idea, in a nutshell. LOL. Your money is not your money, and your cash savings is not your cash savings . . . it's all linked to the other paper pile through the ether, in a fiat money system.

Keynes' idea is not that simple. People who attacked Keynesian policy only creates inflation didn't really get Keynes. If anything, Keynes became famous because he predicted the hyperinflation of Weimar Republic. He was present at Versailles peace conference as a financial representative for Britain. He was so against the harsh treatment of Germany at the conference. Later, he quit the negotiation and wrote a book 'The Economic Consequence of Peace', in which he predicted the hyperinflation of Weimar Republic and the following disaster. This book is still a great reading and has very practical lessons for our future IMHO. I might elaborate it later.

The real core of Keynesianism is demand creates supply. Keynes was not against free market but he believed the market stops functioning at the time of a big recession like 1929, because people in face of unknown risk in the future would horde cash. The lack of demand will diminish supply and in turn further increase cash hording. The market the would be trapped in a level of low activity and can not pull itself out of it. This is where the government comes to the rescue. Since the 'excessive' savings were the guilty, the government's responsibility is to spend the money for you through tax or inflation. You might criticize Keynes for pulling money from under your mattress, but that's exactly what he wanted to do.

I was shorting home builders starting in 2005; when I talked about the housing bubble and coming collapse at the Memorial Day BBQ that year, some family relatives looked at me as if I had gone nuts. LOL. I wasn't even a card carrying Austrian yet back then. IMHO, Keynes just wanted to sell books and get government tenure. His "General Theory" was more of a post-facto apologia for policies that had already been put in place by Japan, Italy, Germany and the US. The cravenness was shown in the introduction to the German edition of his book: he actually wrote a totalitarian system would be able to implement his policy "suggestions" better than a Western Democracy would.

That's true. The New Deal was more a brain child of the Fed chairman of the time, Marriner Eccles.

I too had that moment of epiphany when I was guided to examine economic topics in detail on the level of individual actors . . . for example, GM supported the unions in the early 50's because the union work rules and benefits were effective ways to shut out smaller competitions as GM had the economy of scale and could absorb the overhead cost to deal with the myriads of new regulations whereas a smaller and more innovative new car maker would not be able to. Examined at that level, one has to come to the conclusion that bureaucratization of a society can only serve to tilt the field in favor of the big incumbents at the expense of new and smaller (would-be) challengers . . . eventually stymie the society itself.

Walmart probably has more advantage in dealing with a tariff act, because they can play one supplier against another and drive down the cost. But I don't think small trade corporate will be hurted too much, because China will have more export supporting policy or drive down the RMB ever more. Also the productivity of Chinese exporter is growing 20% annually. It won't be too long for them to consume the pressure.

[brightness]

The real core of Keynesianism is demand creates supply. Keynes was not against free market but he believed the market stops functioning at the time of a big recession like 1929, because people in face of unknown risk in the future would horde cash. The lack of demand will diminish supply and in turn further increase cash hording. The market the would be trapped in a level of low activity and can not pull itself out of it. This is where the government comes to the rescue. Since the 'excessive' savings were the guilty, the government's responsibility is to spend the money for you through tax or inflation. You might criticize Keynes for pulling money from under your mattress, but that's exactly what he wanted to do.

That's exactly what I wrote in my previous post: The more people put under mattresses, the more the government can print away with impunity. In Keynes' point view, it's the government's moral/fiscal responsibility to "step into the breach" and take the money from under the mattresses through printing.

IMHO, the fundamental Keynesian axiom "Supply = Demand" is invalid. In economics, "supply" and "demand" are efficient supply and qualified demand. When new ways of doing things more efficiently are found, the new information is not shared by all market participants. Only the supplier using the new methods of production is privy to the new information initially. That creates a situation where temporary "efficient supply" is greater than "qualified demand" at existing prevailing price level; hence the society progresses and the price level gradually moves down as the information of more efficient production becomes more widespread. Conversely, if a sudden disaster takes out supply (without any prior prediction), supply is less than demand during the time when price is moving up; in fact, the supply-demand imbalance is the reason why price is moving up. Keynesian axiom "supply = demand" is a description of statics, a little like the Xeno Paradox, where a flying arrow is assumed to be stationary at any given moment hence can never get from point A to point B. The key to solve that paradox is the recognition that no matter how thinkly time is sliced, the arrow is moving in an correspondingly infinitisimal amount; the sum of infinite numbers of infinitissimal is most certainly not zero. Likewise, no matter how thinly sliced the time line is, new ways of doing things are constantly being thought up. Hence Supply != Demand. Keynesian "Supply = Demand" is tantamount to holding the economic progress in suspended animation; when Demand is artificially juiced up to outpace Supply, it's tantamount to imposing sudden disasters on the economy (the resources misallocated to meet artificial "Demand" is made unavailable to would be Supply) . This is one of my big ideas, and I claim original authorship to it. LOL.

Walmart probably has more advantage in dealing with a tariff act, because they can play one supplier against another and drive down the cost. But I don't think small trade corporate will be hurted too much, because China will have more export supporting policy or drive down the RMB ever more. Also the productivity of Chinese exporter is growing 20% annually. It won't be too long for them to consume the pressure.

Big corporations can set up third-country transit points to circumvent country-specific targeted tariffs . . . big corporations can hire lobbyists and buy politicians to make exceptions to laws or even write the laws to begin with. None of that is available to small companies. I doubt even Chinese exporters can grow their productivity at 20% annual rate indefinitely; 20% rate for a few years, then hit a brick wall, perhaps. I'm skeptical of any business plan that projects 20% growth rate into perpetuity. I used to joke about one of my own businesses as a 50% annual growth rate business until it isn't (at the time it was, for 4 years in a row). A successful businessman has to plan for those eventualities, and learn to roll with the punches.

[Howard Fu]

That's exactly what I wrote in my previous post: The more people put under mattresses, the more the government can print away with impunity. In Keynes' point view, it's the government's moral/fiscal responsibility to "step into the breach" and take the money from under the mattresses through printing.

Agree.

IMHO, the fundamental Keynesian axiom "Supply = Demand" is invalid.

I'm not sure if Keynes said Supply equals demand. My impression is he saw demand as a kind of scarce resource. In times of depression, the supply is overly abundant or there is 'surplus supply'. The economy doesn't grow because lack of demand. So the way to make economy grows again is to create demand by the government.

In economics, "supply" and "demand" are efficient supply and qualified demand. When new ways of doing things more efficiently are found, the new information is not shared by all market participants. Only the supplier using the new methods of production is privy to the new information initially. That creates a situation where temporary "efficient supply" is greater than "qualified demand" at existing prevailing price level; hence the society progresses and the price level gradually moves down as the information of more efficient production becomes more widespread.

I'm afraid it's not that original. It's like a combination of Hayek and Schumpeter's ideas. Yes, the economy grows because entrepreneurs found more productive ways of production. (Schumpeter) The information is limited to the entrepreneur himself at first, so he can sell the same things at a lower price or charge a high price on the new product he invented. The price is the most important channel of spreading these informations. (Hayek) Thus attract other entrepreneurs to compete with him.

Conversely, if a sudden disaster takes out supply (without any prior prediction), supply is less than demand during the time when price is moving up; in fact, the supply-demand imbalance is the reason why price is moving up.

Prices usually fall at times of depression. Prices go up is a result of central banks printing money to prevent recessions. Things were not like that before Keynesian and monetary school became dominant.

Keynesian axiom "supply = demand" is a description of statics, a little like the Xeno Paradox, where a flying arrow is assumed to be stationary at any given moment hence can never get from point A to point B. The key to solve that paradox is the recognition that no matter how thinkly time is sliced, the arrow is moving in an correspondingly infinitisimal amount; the sum of infinite numbers of infinitissimal is most certainly not zero. Likewise, no matter how thinly sliced the time line is, new ways of doing things are constantly being thought up. Hence Supply != Demand. Keynesian "Supply = Demand" is tantamount to holding the economic progress in suspended animation; when Demand is artificially juiced up to outpace Supply, it's tantamount to imposing sudden disasters on the economy (the resources misallocated to meet artificial "Demand" is made unavailable to would be Supply) . This is one of my big ideas, and I claim original authorship to it. LOL.

Keynesianism is not static. Economy does grow in Keynesian theory. It's just the demand goes first. The fundamental difference is Keynes see recession as a kind of unpredictable random event that must be prevented. Austrian theory see recession as a 'good thing'. Recessions occur because there is structural imbalances in the economy. Recession is the force of the market to restore the balance. When the imbalance in the economy grows large enough, a financial storm will occur and any attempt to prevent the market restoring the balance will fail if not make thing worse.

To use water as an analogy again. In the summer, the sea water in the equator rise fast compared to sea water at higher latitude. Storms are a way of the nature to eliminate this imbalance. If human finds out a way to delay the storms, the temperature at the equator will rise higher and higher, and when the storm finally comes it is even more violent. Storms are not the failure of nature. On the contrary, they are the nature at work. Water always seeks its equilibrium point. It's a physical law just like the law of gravitation. But water in natural state is almost never at its equilibrium point, which is its static state, because there is always outer influences. But it doesn't mean the law is wrong. To accuse the market failed at recession time is like someone throws up things into the air and claim he has found flaws in gravitation law.

Of course, we can't predict exactly when or at which point a storm will occur. To make that kind of prediction requires a kind of mathematics we dont have today, though I'm pretty sure it's related to the chaos theory. In fact, we don't even have the mathematics to predict water's behavior when you open a hosepipe. But from experiences, we know there will be typhoons and hurricanes every summer.

Big corporations can set up third-country transit points to circumvent country-specific targeted tariffs . . . big corporations can hire lobbyists and buy politicians to make exceptions to laws or even write the laws to begin with. None of that is available to small companies. I doubt even Chinese exporters can grow their productivity at 20% annual rate indefinitely; 20% rate for a few years, then hit a brick wall, perhaps. I'm skeptical of any business plan that projects 20% growth rate into perpetuity. I used to joke about one of my own businesses as a 50% annual growth rate business until it isn't (at the time it was, for 4 years in a row). A successful businessman has to plan for those eventualities, and learn to roll with the punches.

I'm no expert. It's not much money to set up an office in Hongkon or Singapore, I suppose.