Never short a country with $2 trillion in reserves?

http://mpettis.com/2010/02/never-short-a-country-with-2-trillion-in-reserves/

by cwan • 16 years ago

137 82 16 years ago

jhancock• 16 years ago

This is the most level-headed view I've read on this subject. A worthwhile read.

siculars• 16 years ago

Wow, Michael Pettis melts one particular face in specific and lays out a historical precedent analogous to China's current horde of foreign reserves. Without cribbing his article too much, my main takeaway is the underlying economic imbalances at play in China that have resulted in their accumulation of foreign reserves, particularly 2 trillion US dollars.

discolemonade2• 16 years ago

I remember reading the Friedman piece several weeks ago and thinking to myself, "This guy drank the China kool-aid too." It's part of the whole American declinism notion that pops up every ten years or so and I've never believed it. We were there with Japan in the 80s, The Soviet Union, the EU, and now China (and India too). It's easy to believe China is going to be the next superpower if you look at its growth relative to the U.S over the last decade. But the thing that's always made me skeptical about any country replacing the U.S as the world's lone superpower any time soon isn't our resources. It's our sense of mission and purpose in the world. It's something that nobody else has. Only we have it because it's in our cultural fabric. It's not something you create on purpose. It grows organically out of a hapenstance of historical events. It informs everything else about us. You see it when you travel to other countries and come back. Americaness is optimism and hope. It's a source of our soft power, which is extremely attractive to the rest of the world. It's why everyone wants to be American but nobody secretly wishes they were Chinese or Nigerian or Brazilian. China or Russia or the EU or India don't have that sense of mission and purpose in their psyche. No amount of military hardware or GDP growth can compensate for that.Superpowerdom is unsustainable without it. So China could be a paper tiger.

enjo• 16 years ago

Except for China. They actually have a very similar concept of destiny and mission.

I think the issues with China are going to be much more practical. They remind me a lot of the Soviet Union. A closed society that is very effective at giving the appearance of prosperity, while under the covers things are very different. They'll be able to keep it up for a decade or two, but over time the whole thing crumbles as the base was never truly well built.

Our biggest advantage lies in the risk taking aspects of our culture. We're a people that celebrates the type of risk that leads to true innovation. The cool thing: It's not just the U.S. anymore. Europe has caught on as well.

I do think the United States is going to weaken (relatively) in the coming decade. We'll still be a world power, but I think we'll be sharing that with a re-awakened Europe.

jimbokun• 16 years ago

"It's not just the U.S. anymore. Europe has caught on as well."

Europe has taken on U.S. style risk taking? I have honestly not heard or read this elsewhere. Can you elaborate?

ErrantX3• 16 years ago

> It's our sense of mission and purpose in the world. It's something that nobody else has

Except China (also a number of other countries)

johngalt2• 16 years ago

That's a good test when viewing these arguments for the "next superpower". I'd always ask the author; what do you feel made the USA successful in the past? Why has that changed?

Most of the American declinism supporters still cite WWII as the only reason for American economic ascendancy. I'm skeptical that markets take 65 years to correct.

Quarrelsome3• 16 years ago

65 years to correct? Consider the British Empire in 1914 and then again in 1971. It's more or less the same for all European nations. We lost our minds, a generation, many of our cities and all of our empires. 65 years is not going to correct that, it was a one-way street.

Do you have ANY understanding of the state of Europe's economy following WW2? We were heading for WW3 after the US pulled the mat on the debt repayments. Luckily Marshal understood this and hence the Marshal Plan prevented WW3 in Europe.

stonemetal• 16 years ago

What has changed is the easy part. It is Richard Hilton vs Paris Hilton. Born to power and an easy life has made the US soft. The average US citizen demands that the government fixes their problems.

Quarrelsome3• 16 years ago

Well you'll find that a history of being the "superpower(s)" and then wasting it all by bombing the crap out of ourselves results in a slightly different point of view in the world (from the EU).

Empire building was Europe's "sense of mission and purpose in the world" we made the natives "civilised". It was our belief of divine right and our ridiculous optimism in regards to war and "glory" (it will be over by Christmas) that led (in part) to our downfall.

alextp• 16 years ago

Friedman is one of the worst sources of opinion I've ever read. The World Is Flat (which is, admitedly, his only substantial work I've read cover to cover) is filled with unwarranted conclusions and groundless generalizations and altogether horrible metaphors. I've learned to just tune out when he's mentioned.

spot• 16 years ago

yea really. the original story cites him as a middle east expert... who cheered and approved of the invasion of iraq. now that's a record to be proud of.

EDIT: i do agree with him though that the US should invest in sustainable energy.

nitrogen3• 16 years ago

I found The World is Flat to be a useful insight into conservative economic thinking. I also interpreted it as an attempt to persuade the conservative political and economic base to take a more global look at their activities using their own language, rather than as an accurate treatise on globalization.

In that context, I was able to get past his obeisance to the corporate superpowers of America and his other inaccuracies, and see points that may be valuable. Even though I frequently disagree with their opinions, Friedman and another conservative, George Will, are two of my favorite editorialists. Maybe the fact that I'm neither liberal nor conservative contributes to my enjoyment of their writing.

fauigerzigerk9• 16 years ago

I tend to agree with you, albeit reluctantly, but let me ask you this: If another country, say China, had that sense of purpose, would you know?

We don't speak their language (at least I don't), so we cannot watch their version of Hollywood movies or read their version of Hacker News. Therefore I wouldn't be too confident in my beliefs. They might turn out to be cliches.

discolemonade2• 16 years ago

It's easy to tell. You just need to use what I call the boast test. It works on countries just as well as it does on individual people because countries are made up of the sum character of the people. Basically, it says that the harder someone tries to let others know about their abilities, the less animated they are by a deep sense of purpose. People with real, deep power and deep purpose don't boast. They're calm. But you know they have power. A second rate power like Russia is eager to boast about their military capabilities. China's Olympic spectacle last summer was a classic example of this notion. The only recent power I can think of that had that sense of calm was Great Britain. They just had the right stuff. And they changed the world. Churchill's speeches could have been written by any U.S. president. The EU sort of has it, but it's not willing to back it up with muscle...not necessarily war...but just declaration of purpose in their leaders. Maybe it's because they're secular. I don't know. But they don't really have it. No one does.

rdtsc• 16 years ago

> It's our sense of mission and purpose in the world. It's something that nobody else has. Only we have it because it's in our cultural fabric.

Really, you believe that stuff? That sounds like some kind of propaganda or something you would tell a child. Do you think the Chinese tell each other "We have no purpose in the world, we are a silly nation, we'll never amount to anything."? On the contrary!

Yes, we are what we are because of culture, but mostly because we won WWII, and happened to have lots of nukes, tanks, ships.

redcap• 16 years ago

It's not so much that China is going to be the lone superpower - it's going to be more of a multi-polar world again as the US is still light years ahead at least in terms of military tech.

sailormoon4• 16 years ago

You reckon? Who do you suppose gets the most bang for their military buck? Who's got the bigger manufacturing base, which is what all big wars come down to in the end?

The USA still has the superior military, yes. But even now, it would be a very nasty fight indeed. In ten years' time, when China has handsomely exceeded the ship numbers of the US Navy, it's anyone's guess who would win, and let's hope we never have to find out.

vorg• 16 years ago

The US will eventually decline economically relative to China, but the US has other advantages, besides military tech. The US has exported its political model to Western Europe over the past 100 years. A lot of middle-class people in China want to live in the US, Canada, Australia, and Europe, and will do so as fast as those countries let them in. The English-speaking countries will let them in the quickest, perhaps to buy those empty houses. Such emigration out of China, coupled with their one-child policy, means China will hit a demographic wall quicker than Japan ever did.

And of course, because of Western countries' tradition of federation and democracy, the US and Canada can slowly merge with the EU, treaty by treaty, just as fast as it needs to to counterbalance China. NATO is just the beginning of this. I'd imagine Russia will eventually, perhaps in 20 or 30 yrs, join the EU, Euro, and even the Schengen zone one day. Such a combined US/Canada & EU/Russia would have well over a billion people, with most people probably speaking English, and be centred around the Arctic Ocean, which by then would be the best land on the planet because of climate change.

But who's China going to federate with? They've had trouble keeping their Western provinces in check, and keeping their own people inside the country. They'll probably get Mongolia, maybe even Burma, within 50 yrs, but none of their other neighbors will trust them enough to let them too close. Russia will look to Europe to help defend its Siberian resources before it lets China in. Perhaps their immigrants to the West will stay loyal as part-time spies, but their children certainly won't.

In 50 yrs, a combined US/EU/Russia will be top dog, with China lagging in 2nd place, and Japan, India, Brazil, in the third tier.

nitrogen3• 16 years ago

It's our sense of mission and purpose in the world. It's something that nobody else has.

Whether that's true now is debatable in my opinion. I think the American dream has been perverted into a lust for enhanced mediocrity. People where I live seem to want to get a job with good benefits, a decent house, and a nice TV, so they can just get through their lives by watching sports and reality shows. Everyone wants to be the best middle-class, Prozac-popping average Joe they can be.

timwiseman• 16 years ago

True of most people, but this tends to be true of most people in every circumstances.

What seems to be different about America is that we provide the opportunities and to a degree the encouragement for those who do not want to be like that to succeed, or at least make valiant efforts and often make some progress in those efforts.

coffeemug• 16 years ago

You know, there is nothing wrong with leading a quiet life and enjoying the little things. Waking up next to your wife every morning, having breakfast together, packing the kids off to school, having an honest job that pays the rent and doesn't induce tortured battles in the darkest chambers of your soul every day. You are the embodiment of mission and purpose parent was talking about, but make no mistake, that does not mean mission and purpose is in any way more honorable than peace and quiet. Live and let live.

jacquesm8• 16 years ago

> It's why everyone wants to be American

Pardon?

Seriously, do you actually believe that?

Definitely not everyone 'wants to be an American'.

The only people that 'want to be American' in very large numbers are those that currently are below the standard of life that America offers, and plenty of those people would still be quite happy to be European, Japanese or even Australian.

As for your sense of mission and purpose in the world, that might be more of a problem than a part of the solution.

sailormoon4• 16 years ago

Hey, whaddya mean "even" Australian? ;)

I agree with you otherwise, though I'd remove Japanese from that list. The streets of Tokyo are not exactly paved with gold these days.

forinti• 16 years ago

This Brazilian wouldn't want to live anywhere else (except maybe Portugal, but not forever). And I've lived in Europe and worked with Americans.

bl4k3• 16 years ago

The rest of the world don't want to be Americans, they want to be better than Americans.

America is the current yardstick, not to be confused with adulation.

ytinas3• 16 years ago

Ironically your post has shown the true power the US has. Abnormal levels of patriotism. America has declined. Drastically. Look at what the middle class has today compared to years prior. Did you know there was a time that middle class in the US meant you had servants? Money has vacated the middle classes and flooded into the upper classes in the last 20 or so years.

I grew up in the US and I live in western Europe now. I don't see myself ever going back long term. I feel like my standard of living here is much better.

johngalt2• 16 years ago

A good counterpoint to the title quote would also be "Never expect a good thing to last forever".

At some point growing investments gain a momentum all their own. I.E. everyone invests in China because of their double digit growth; and China has double digit growth because everyone invests in them.

The problem with a compounding growth curve is that it gets so steep that it shoots past the place where it should have found equilibrium.

bilbo0s• 16 years ago

So Chanos may turn out to be wrong, but not for the reasons Friedman thinks he is. This is probably a reasonable view.

Professor Pettis is also correct in asserting that the role of central bank reserves is one of the most misunderstood concepts in economics. In fact, nowadays, almost any economic concept as it relates to governments or sovereign states are routinely misunderstood. Probably because that is precisely the part of the economy that the average person feels they understand so well.

For instance, many people worry, rightly by the way, about our USD1.4 Trillion deficit. They feel qualified to comment on its implications authoritatively since we can SORT OF understand the concept. Yet you see no publicly expressed concern at all over the USD500 Trillion house of cards that is the derivatives market. Very few people understand derivatives markets well enough to know the implications of this situation. I think this causes us not to think about it and to hope that someone else will deal with it before the bottom falls out.

Now understand that these guys are not average at all. I have attended Pettis' talks and he is definitely not average. But I think the same sort of intellectual dynamic goes on even in their circle.

mediaman2• 16 years ago

Office vacancy rates in Pudong are over 50%. Many of the signs of excess capacity are readily apparent in China: it is only the massive currency injections, in keeping the currency pegged to the dollar, that have allowed such expansion unjustified by demand.

One way or another, China has borrowed from the future and will have to pay for this excess expansion. It could be a crash, or it could be years of stagnation as the nation attempts to use up the excess capacity it has built.

This is a good piece written by someone who understands the underlying economics.

Chanos has been criticized as just recently beginning to study the Chinese economy, but sometimes being fresh to a subject helps distance an analyst from recent past--which can be a good thing.

maxklein• 16 years ago

China is taking all the massive cash it is making now because there is no other really big and cheap factory, and sticking it into infrastructure. Buildings, roads, subways, minority villages - all of that is being built up.

Even if you have a crash, a built road is still there and a built office still exists. Pudong is empty because the offices are expensive and it's not really in town - if a crash happens that forces the government to reconsider whom they want to target pudong at, then there will be enough people moving in there when the prices are right.

China is not developed, it's developing. It's not borrowing from the future - the U.S is borrowing from the future and giving it to china. China is taking the money and building infrastructure.

Property is not expensive in china. There is no excessive inflation or speculation. China has the typical bubble of any rapidly growing economy, but the huge internal market, massive infrastructure development, and large population of highly educated people, and the introduction of chinese businessmen to secondary markets in Africa and South America mean that the fundamentals of the chinese economy are fine. If there is any bubble, it will blow over and growth will continue.

ohashi• 16 years ago

Infrastructure for infrastructure's sake? If it crashes and forces the government to re-think things, you think this happens instantly? That crash is figuring things out and filling up the excess capacity.

houseabsolute7• 16 years ago

> built road is still there and a built office still exists

You could equally well say this of a house foreclosed on by a bank in the U.S. during the housing crisis. But do you really have any doubt that such houses lying fallow and the resources that go into reselling them are both economic losses? The same will be and is true of the empty offices and untravelled roads in China.

lucifer2• 16 years ago

A country that can draw from a larger pool of "geniuses" can afford channeling that resource into a larger set of activities. Dividing China into 4 will result in a set of nations with a reduced set of talent to distribute in key national industrial and scientific efforts.

hga• 16 years ago

Yes, but how will that help the broad economy?

For example, it could help you to increase your level of military technology, but it doesn't provide markets for all those factories who's export markets are drying up.

Haven't we learned that central planning doesn't work (for long) for this sort of thing? See Japan, Inc.

lucifer2• 16 years ago

You've misunderstood [my] post. The article is arguing that China's massive population (and consequently the size of a cream of the crop brainiacs slice) is irrelevant, which made little sense. [edit]

nazgulnarsil• 16 years ago

This is because it is about central bank reserves, a topic that to my dismay probably generates more confused and mistaken thinking than any other topic in economics.

not understanding the basics of sovereign accounting is understandable. could you make heads or tails of a companies finance if they did all their accounting in their own stock?

va_coder• 16 years ago

If one factor - large reserves - leads to economic problems than this guy is dead on. But it doesn't.

Economic success or failure is due to many factors.

He should have chose to argue with Jim Rogers, who has much more credibility, than Friedman.

mediaman2• 16 years ago

His argument is that large reserves do not protect from economic problems. This is in response to Friedman's assertion that the Chanos analysis is wrong because despite excess capacity, China can use its currency reserves to stave off recession, which isn't true.

In the article he states explicitly that large reserves do not necessarily cause economic problems.

known• 16 years ago

I hope China will invest more on its Infrastructure & Irrigation projects.

Never short a country with $2 trillion in reserves?

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