Let's talk some Economics

Let's talk some economics, since there seems no escaping for that.

I find Economist online, my favorite news magazine is now totally open and free. There's no longer subscriber-only content. But my Nike shoes nevertheless stays about the same price. While we marvel the free contents online, let's not forget they are not actually costless. It's advertising from the likes of Nike and the price I pay for it keep the web world, including this blog service from google, free.

My brother, who was recently visiting the U.S. told me everything here is so cheap. Well, maybe not his eat-out bills. And he was so mad at the Bank of China for balancing out his dollar credit prematurely. That is of cause due to the continuing slide of dollar against most major currencies including RMB. For Americans, the concern is mostly focused on $135 a barrel crude and $4 a gallon gasoline. These things are more related than you probably think, and U.S. and China are trying to sort it out. (You can also be sure that China will be firm on the Darfur issue. Subsidy and not paying for the market price keep the gas price in China at $2.5 a gallon.)

Aside from the often mentioned demand shock from emerging markets like China, at least part of the reason of the expensive oil is the depreciating dollar. It reflects the diminishing purchasing power of the currency. The exchange rate, as they like to say, is fundamentally a "money phenomenon". The fed has issued billions of new dollars just to cover the sub-ordinate market crisis. Over the last eight years, the American economic theme was about spending - tax cuts, financing the war, etc. Here, China is also complicit. In that economic arrangement, China's huge trade surplus against the U.S. partly made the spending and the housing market bubble possible. That may be the reason why the U.S. has never serious take any economic action against China - sanction or tax slap - despite the repeated threat. Under normal circumstances, a country is willing to run continuous surplus this lend money to the other country because it expects the future growth of the foreign country will be higher than its own. However, the expectation never comes to fruition, it turns out to be the housing bubble. Or, should be say it is pushed out to the more distant future? Under the current U.S.-China exchange rate system, the fed is the real central bank, both in the U.S. and China. China running continuous surplus is no different than farmers in Wyoming provide New Yorkers with beef and lend them the sales money for them to play in the stock market.

So, will China or should China continue to appreciate its currency? It's a complicated question to answer. Chinese dollar reserver is at the record high, but exports has already signs of slowing down. And China has huge appetite for growth due to its structural problems. Americans multinationals are not doing too bad amid China growth either. For an extreme example, Chinese banks are said to be among the worst managed banks in the world, so why can Banks of America reap billions of profits from its minority stakes in Chinese banks, big enough to cover its sub-prime loss? The answer can only be growth. If China allows RMB to further appreciate much, the growth will further slow down, and the American debt Chinese own will certainly worth less. (Chinese system is equivalent to letting the government manage all foreign exchanges for you.) The only decent choices for China would then be, like the Japanese used to do, to use the new purchasing power to purchase American assets and American technology, both of which American government is wary of. On the other hand, if China stick mostly to the current peg, it runs the risk of importing inflation, especially form hot money. The advantage of an authoritarian government is that China has the apparatus to control capital flow and limit credits, to a degree. The reverse ratio has been increase several times recently.

So, there's a lot to tango with. My brother will continue to ponder how much he'll lose when he has to convert dollar back to Yuan. And I tell him not to worry too much. At least, it's a better problem to deal with than the $4 gas price. Oh, and don't expect China will hike the gas price dramatically either.

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