From Pinetree Capital’s Macrobits by Marshall Auerback:
it is questionable how many more benefits can accrue to the Chinese people by foregoing the benefits that using their own resources might bring and shipping more to the rest of the world in return for bits of paper than they are getting back in terms of real goods and services.
Reflecting this perspective, there is an interesting interview with former German Chancellor Helmut Schmidt in a recent Monthly Bulletin of the Official Monetary and Financial Institutions Forum (OMFIF). The interview was conducted by Dave Marsh (co-chairman of OMFIF) on behalf of the Handelsblatt. Although it deals specifically with Germany, it does have implications for China as well:
Handelsblatt: I remember you saying many times, if the Germans keep the D-Mark we will make ourselves unpopular with the rest of the world; our banks and our currency would be the Number 1, all the other countries would be against us and that was why we should have the euro to embed us in a larger European undertaking. It’s all rather ironic, because people are saying that Germany has profited a great deal from the euro because the D-Mark has been kept down and this helps German exports …
Schmidt: I ask myself whether this profit really is a profit? I wonder whether running perpetual current account surpluses really amounts to a profit. In the long run it is not a profit.
Handelsblatt: Because in the long run these assets will have to be written down because people won’t pay them back …
Schmidt: Yes – it means that you sell goods and what you get back is just paper money and later on it will be devalued and you will have to write it off. So you are withholding from your own nation goods that otherwise they would like to consume.
Schmidt’s insight is key: production of goods for export reduces the portion of output available for domestic consumption – generating incomes that raise demand but without satisfying this demand through increased supply available for consumption. Additionally, competition in export markets often leads to domestic policy to keep wages and other costs low – both to fight the domestic inflation pressures (fuelled in part by the processes just outlined) but, more importantly, to compete with other low wage developing nations.
Read the whole article here: China’s Trade Surplus Is Not All That It’s Cracked Up To Be – Macrobits by Marshall Auerback