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Shopping in Shanghai
Random things I want to remember, and musings about my research.
Shopping in Shanghai
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About Me
- Ami Ganguli
- Helsinki, Finland
24 comments:
Ami,
Regarding the North Korean missile tests,
Do you have any feeling about what the general "man on the Chinese street" opinion of the situation is? How about trade relations? Is there enough trade with S Korea, Japan, and the US that China might quash the testing in NK to bring stability?
Hi Stryker,
I haven't heard any "man on the street" opinion of the NK missile tests. There could be a few reasons for that: 1. I just don't have a lot of friends here who like to talk about politics, 2. there isn't much coverage of it in Chinese media.
I can say that there is a lot of trade between China and both Japan and South Korea. About 60,000 South Koreans - business people and their families - live in Qingdao alone.
China has a genuine interest in stability in the region. Much more so than the U.S. or Europe. I'm confident that stability is the primary goal of Chinese foreign policy here. This might put them at odds with the U.S. which would probably prefer regime change over stability if they felt they could pull it off.
... Ami.
Ami, some might argue that stability can't be achieved without regime change in NK.
Is a region "stable" when starvation is rampant and people live in abhorrent conditions? When the gov't actively pursues both of these conditions in order to maintain power? Because that's the only way I can see anyone making a legitimate claim that NK (and much of Africa, for that matter) is "stable."
Richard, you once again have twisted the meaning of a word into something entirely out of context with its explicit earlier application. I used to harbor some doubts that your obtuseness wasn't entirely deliberate, but not anymore.
Ami used the term "stability in the region." That's a well-recognized phrase in international relations and primarily refers to keeping the threat of armed conflict low in order that peaceful commerce can occur. A military conflict between North Korea and any of its neighbors - or the United States - would threaten that stability. And, like it or not, comments like those from the White House that the US is considering shooting down test missiles or that the US has decided not to launch a preemptive strike on the launching pad for those missiles is destabilizing. The North Koreans' announced intent to test their missiles by launching them is also destabilizing.
As to Africa, I know of noone who would term the situation in and around Sierra Leone and Ivory Coast, or Sudan, or Somalia, or the Congo, or in parts of Nigeria, as being stable. There are presently armed conflicts either actively underway or in a state of uneasy truce in each of those areas.
China has stated, and really appears to be following, a policy of "Peaceful Rise".
Their stated policy is to pursue peaceful relations with their neighbours and seek regional stability in order to create an environment that will encourage economic growth. I don't think this position is just propaganda - they've been walking the walk since Deng Xiaoping began economic reforms in 1978.
The only serious threat to this policy is the issue of Taiwan. For some reason the 'One China Policy' is incredibly important to the Chinese leadership. I haven't really figured out why they care so much, but I do think that China would be prepared to go to war if Taiwan made a symbolic declaration of independance. Such a conflict would be a disaster for China, but they're pretty fanatical about it.
On the other hand they're quite happy to let the status quo continue for the forseeable future. Both sides of the straight benefit from the current peace and strong business ties. China won't launch an invasion unless Taiwan makes political steps towards formal independance.
... Ami.
Indy, I'm quite familiar with the int'lly accepted meaning of "stability in the region." I think it's a load. A lack of actual armed conflicts doesn't definitively say that a situation is stable to me (the Cold War, for instance, wasn't a time period of stability, though armed conflicts were typically confined to small areas, instead of the large-scale wars directly preceding it).
It's probably no surprise to anyone that the US Fed had been tightening the money supply and raising rates. But the ECB, Japan and other central banks have also been tightening rates.
Is anyone else concerned that global tightening will induce a widespread recession? Is the fear of inflation enough justification to induce a world wide economic slowdown?
Ami,
Thank you for your thoughts!
Brian,
No, I don't think it will cause a general slowdown. I think our economy currently is Smoking hot. That can cause some problems with stability, so I think there will be a brake on the US economy from ~6% to 3% growth. I do think that the press tends to underestimate the economy, which might add some jitters. (right now we are up 10% off the 52-week low.)
indy, Richard,
I tend to agree that China is looking for stability, and that hungry nations don't tend to be stable. I think Indy is correct that NK *is* stable, however. I think the North Koreans have gotten used to their plight, and regime change is more likely to mobilize them against an outside force than anything else.
Incidentally, I think that the admin is dead on right to insist on multi-latteral talks. I don't think there is anything (except start a war) that we can do without both China and S Korea.
Well, we can agree to disagree on that, Stryker. Perhaps NK is only wishing to project the image that they'll strike out based on little/no provocation, instead being more interested in using this as a bartering chip than actually launching weapons in an int'l game of chicken. Perhaps.
However, I also agree with you that an invasion isn't how I'd try and handle this situation (at least at this point). Our diplomatic route hasn't run its course yet, and I'd rather run those options out before moving towards a military solution.
For those who are interested in such things, it appears that Ward Churchill is going to be fired from U of CO. I imagine it's officially going to be for plagiarism and falsification of credentials, but the real reason is likely the heat the college has gotten for his comparing those in the WTTs to Nazis.
Regarding the economic growth, the question most people are asking now is whether or not the slowdown in the U.S. will spread to the rest of the world. Can the world, and China in particular, "decouple" from the U.S.?
On inflation and interest rates... in general it's very important for central banks to manage their credibility. If investors believe that the central bank won't be willing to control inflation, then inflation becomes a self-fulfilling prophecy. So the answer is, yes, central banks must be aggressive in fighting inflation because if they aren't then they lose credibility and any future fight against inflation will become more difficult, requiring even more tightening.
Nobody wants to go back to the early '80s where very high interest rates were needed in order to get inflation under control.
... Ami.
"Nobody wants to go back to the early '80s where very high interest rates were needed in order to get inflation under control."
Late '70's-early '80's.
Richard,
I graduated with a History minor (from PSU) so I have been following the Churchill thing closely. I agree the reason he was examined is because of his views, and he was expelled because of his plagerism. This is a bad thing, because is indicates that as long as someone is popular/acceptible, they will not be held accountable for plagerism.
Ami, I think you are right about the credibility issue. I would like to see better education of the people here in the US anyway. It seems like many people seem to think that 4-5% loans on houses are normal, and that 7% rates are outrageous and indicitive of uncontrolled inflation. But maybe I'm wrong and people don't think that.
Ami, I have a question for you about the "slowdown" of the US economy. In the last several years, hasn't the US economy been growing FASTER than Western Europe by about 2% per year? If the US growth drops to 1%, what would you expect Europe's growth to be?
Hi Ami,
"the question most people are asking now is whether or not the slowdown in the U.S. will spread to the rest of the world."
That's what I'm worried about, except I'm worried that too much central bank action will induce a slowdown rather than just controlling inflation. I understand the aversion to inflation, and worse the stagflation of the 70's. I just wish the bankers would make their move, then wait a while to see the effects rather than move, move, move, move, move then check for the effects. I tend to think that the Fed has moved too far in both directions due to the lag in effects from their moves. With the bankers in other parts of the world tightening at the same time, I worry that the effects will be magnified.
Some additional thoughts...
It seems the latest burst of inflation is caused from the jump in oil prices. EVERTHING is effected by the rise in oil. If it's not used as a raw material (for example, everything plastic is derived from oil products), it's used to move the material from producer to market. Most of the increase in oil price is due to increased demand from China (up 13% over last year) without a similar increase in supply.
Given this, just how much will US Fed action reduce inflation? Raising our rates won't really effect demand in China much. My guess is it will only add more costs to the production of US goods and won't really effect demand except in big ticket items like housing and automobiles. I think we're using the wrong tool to control inflation this time.
Stryker: The European economies aren't linked to the U.S. in such a direct fashion. Germany has been undergoing labour market reforms that have hurt growth, and has continued to pay for the integration of East Germany. This pain should begin to start paying off sometime in the near future - perhaps in this economic cycle.
The U.S. was growing on the back of mortgage borrowing. The effects of this debt burden will continue after the economic boost from the borrowing wears off.
So my general feeling is that Europe is better positioned for the growth in the next little while at least.
But... the U.S. is still the biggest economy, and the biggest export market by a wide margin. So the adjustment in the U.S. will hurt the big exporters in Asia and Europe.
I can think of a couple of factors that might help Europe and Asia to decouple:
1. Americans won't be able to stop importing over night. If a 3-5% slowdown in the U.S. only results in a (for example) 10% slowdown in imports, than that might not be too big of a hit, especially when combined with...
2. revaluation of the Chinese RMB, giving Chinese consumers a lot more purchasing power. So consumption growth in China might take up some slack.
... Ami.
Brian: Monetary policy is pretty tough. One of the big problems is that there's a considerable time lag between interest changes and when their effects are seen.
Also the time lag isn't known exactly and appears to have changed over time from about 10 months in the 70s to 15 months more recently.
I also understand your sentiment about oil affecting price levels. I don't know what the "correct" response to this is, or even what the theory says.
My gut feel is that the source of inflation doesn't matter as long as it's not a transient thing. If you think that oil will come back down to $30 dollars per barrel, then you might be correct in ignoring inflation, but if you think it will stay above $60 then the effects on the purchasing power are as real as any other source (like high wage demands from unions), so you need to tackle it.
... Ami.
Hi Ami,
There's an old saying that when the only tool you have is a hammer, everything looks like a nail.
I'm not sure what alternative central bankers have to tightening, but I think causing a recession in order to stop inflation is the wrong way to go... Unfortunately, they don't really have any other tool.
No I don't think oil prices are going to drop much unless we do something to increase supplies or reduce demand (and China, where we have no control, seems to be where the demand is growing). There may be a slight drop if that guy in Iran quits making threatening comments. I think some of them are timed with drops in oil prices and oil prices may be the whole reason for all the noise. BUT, I also don't think oil is going to increase in price much from here either. Either way the oil price induced inflation is going to happen no matter what the Fed does. So what's the point in killing the economy over something you can't greatly change? I'd rather they pause now, let the effects of the oil price increase and their previous moves work themselves out, then see what else needs to change.
My guess is the economy will slow down significantly due to a combination of high oil prices and Fed action. Prices are going to rise anyway even if demand slows due to the oil price increases. That's a cost of goods that's going to have to be priced into products. You can't sell products at a loss.
I'm thinking there's a difference between Fed effects on demand based price increases vs. cost of production based price increases. Slowing the economy by raising rates definitely effects demand and will stop demand based inflation, but it only adds additional costs to production of goods for cost based increases.
For example, Fed action will reduce the demand in the housing market which will eventually lead to a price reduction in real estate. The Fed will have little or no effect on oil demand and therefore the only effect on gas prices will be to increase the gas station's costs of borrowing and may increase gas prices a little more.
Brian: I think you're not fully taking into account the problems with inflation.
I'll try to post something more complete later, but to get an idea, remind yourself that we don't really know right now (ex ante) what the real interest rate is. The Fed controls the nominal rate, and the real interest rate will only become apparent next year when we know what the inflation is over the course of the next year.
If inflation somehow jumps to 6% this year, then the real Fed rate is actually negative right now.
One reason inflation isn't likely to jump to 6% this year is that the market has confidence that the Fed will do whatever is needed to prevent that, even at the risk of putting the economy into a recession. This expectation (which is linked to the issue of credibility) is one of the things that keeps inflation under control.
I know this sounds very circular, but that's actually the point. Inflation feeds itself. Google for "inflation expectations unanchored" for more on this.
... Ami.
Thanks for humoring me Ami.
What bothers me is that this bout of inflation is fueled by the price and (mostly) foreign increase in demand of 1 commodity, oil (actually metals are in a bubble right now too, but that's not quite as pervasive).
I understand the psycological factors in being "credible" on inflation fighting, but this round of inflation is based on the real increase in primarily 1 commodity. I just think using the Fed's hammer on the problem this time is the wrong way to go. Rather than killing the economy, we should probably leave the Fed out of it and do something to increase the supplies of oil (openning up drilling in a few areas, increasing shale oil and oil sands productions, etc). and reducing demand (use of renewable fuels like ethanol and biodiesel, approving wind farms, nukes, lower power lighting, improving CAFE standards, etc.).
The Fed's actions are slamming the whole economy just to stop the effects of a single point cause for inflation. Like I said, when the only tool you have is a hammer....
As inflation grows interest rates also must grow, or you will have the situation which Ami described of negative interest rates. Negative interest rates actually help to overheat an economy, as businesses will borrow money even if they don't have essential capital investment planned for it on the presumption that by the time they need to pay it back revenue increases from inflation will more than offset the interest due.
Ami's also right that inflation feeds on itself. Once a mindset sets in that money saved = money lost the only sensible alternative (tomany) is to immediately convert money into goods and services. Businesses will begin to set prices on the expectation of further increases, and workers will demand (and generally win) frequent upward adjustments to keep pace with inflation. Inflation doesn't need to be outrageous for this mindset to occur, either. It definitely was in place back in the 1970's when the primary catalyst for inflation was an increase in the price of a single commodity - oil.
Ami, what's been the reaction within China to the recent North Korean missile tests, both officially and from the people you interact with in Qingdao? It's been a big story here, not surprisingly, with the usual suspects on the right getting hysterical despite what appears to have been a near-total failure of the Taepong-2 missile which was being tested.
Indy, do you consider this "failed" missile test by NK to be no big deal? Your comments seem to say that.
If so, here are a few reasons it SHOULD be a concern. 1) NK (supposedly) has nuclear capability, 2) this is further proof that the NK gov't can't be trusted to keep its word (they reached an agreement with Japan not to fire missiles like this), 3) this was yet another attempt at provoking the US (the missile was supposedly aimed at Hawaii, and likely would have either fallen just short or landed on the far side), and 4) Russia and China don't seem to really object to this kind of behavior from NK.
The longer this nonsense drags out, the worse it's going to get. At this point, why should they expect ANY reprocussions for ANY action they take? Russia and China seem willing to blockade any meaningful action in the Security Council, which means they've got nearly free reign to bluster and threaten. You assume MAD will keep NK in check, but if they doesn't think the other side will do anything, that theory loses all significance. As things stand now, I don't see why NK (or Iran, for that matter) wouldn't reasonably think we won't do a thing to them.
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