Tuesday, March 10, 2009
china collapse goes mainstream
China has slipped into deflation for the first time in six years. Given its conspicuous excess capacity in a world of falling consumer demand, that now puts the country at great risk of copying America’s position (as a surplus country) in the Great Depression of 1929.
this wasn't difficult to see coming and many people did. but it's the forward ramifications that matter.
the complete collapse of imports to china has allowed its current account surplus to remain quite high. one way to look at current account surplus is as a measure of the excess capacity of a country beyond its domestic need; conversely, deficit implies the need to import to satisfy excess demand. as china's current account surplus remains high, it is effectively sloughing off the global contraction of excess capacity (commensurate with the collapse of demand resulting from the debt bubble popping) onto other countries. the countries bearing the greatest brunt of this are likely those with both large manufacture-for-export sectors and stronger currencies over the last year -- japan, germany, and (surprisingly for some) the united states (which remains the world's largest dollar-volume manufacturer and has seen a huge strengthening of the dollar as global dollar-funding demands outpace available dollar-credit).
as noted by alphaville, with the renminbi still pegged to the dollar, trade frictions will surely rise as a result. the united states is extremely unlikely to sit idly by as china tries to shift capacity contraction and massive unemployment onto its shoulders.
resulting moves to curb trade -- be they overt import restrictions, mercantilist competitive currency devaluations, or simply the collapse of volumes alongside economic activity -- will likely eventually make trouble for government debt and the dollar, perhaps as soon as mid-year, probably resulting in rising interest rates.
only then will we see if the obama administration and the bernanke fed are willing and able to stick to their stimulative guns with wholesale quantitative easing. britain is already there.