“…not with a bang but a whimper”

Doug, Pancoast, an American entrepreneur living in Shanghai, asked to interview me for his blog, and I agreed to do so. I think it was meant to be a brief interview, but I began to respond on a Saturday evening, while waiting for the performance at my club to begin (my office is at my CD label, just upstairs from my music club), and as the performance started late and the questions were interesting and covered a lot of ground, I ended up writing quite a lot.

I thought I might reproduce the interview on my blog, not so much for the interview itself, which you can anyway find elsewhere, but because I decided that I could significantly add to the responses (they are twice as long as the original interview) with a lot of examples and with historical material that I find very interesting, both of which I think many regular readers of my blog do too.


1.) I was so impressed with how fair and evenhanded you are in the book and how you try to consider the viewpoints of all sides. I try to do this in my own writing, but find that it is sorely lacking in today’s society (and indeed throughout much of history). How do you manage to stay so unbiased and so fair in a world where people are tempted to be so prejudice towards one side or another?

Thanks for saying that. To the extent that it is true I think in part it may be because my background is pretty multinational. I was born in Spain of a US father and a French mother, and I grew up in Spain, Pakistan, Peru, Haiti, and Morocco, I have sisters-in-law from Iran and Brazil, I currently live in China, and my whole career and education has been “international”. Perhaps this has forced me to break free of a very provincial attitude among economists, especially those from large countries like the US or China, that among other things prevents them from recognizing how powerful global linkages can be. Everyone knows in principle that changes in one country that affect total production or total consumption automatically require predictable obverse changes in another, but economists often still have a hard time identifying these linkages and acknowledging the direction of causality, even though they know the accounting identities around which the balance of payments is structured that require these adjustment. What is more, they almost always assume that except in the most obvious cases, like the impact of China on the price of steel in the US, events can only originate in the US, or perhaps in Europe, and then cause events elsewhere.

In fact this isn’t true. Because the US economy and its financial markets are so large and flexible, and because many other economies have large players – usually the state – whose behavior can drive deep domestic imbalances, it is often the US that responds to events driven abroad. For example after the 1997 Asian external debt crisis, a number of Asian countries began to accumulate US dollar reserves, and this accumulation accelerated in the next decade. It is purely an accounting identity that if other countries become next exporters of capital to the US, they must run current account surpluses (although not necessarily bilateral surpluses, which are in fact unlikely) and the US must run current account deficits (although not necessarily bilateral deficits, of course), and it is also purely an accounting identity that if the US runs a current account deficit, its domestic savings must be lower than its domestic investment.

Every economist knows this, or should know this, and yet to say that the surge in the US current account deficit during the decade before the 2007-8 crisis was a necessary adjustment to Asian reserve accumulation policies of the last decade is considered an extremely political statement. Some economists in the US counter this claim by arguing that the US deficit cannot be caused by Asian reserve accumulation polices because it has bilateral deficits with many countries, or, what is even more absurd, because it has a low savings rate. It is true that in principle the capital-flow imbalances could have been caused by a decision by American households to reduce their savings rates sometime around 1997, which forced someone else – the East Asians, for some reason – to raise their savings rate, but it is hard to explain why excess US demand for foreign savings, and not excess supply of foreign savings, would have been accommodated by declining, not rising, interest rates.

It seems so logical, and yet it has become such a politicized argument in which the balance or payments identities are almost never invoked. I suspect the prejudice that only Americans can act independently, and everyone else must respond, may exist at least in part because most economists have either studied in the US or have studied under US-trained economists, and so without realizing it have developed a US-centric view of the world that cannot posit an alternative world.

I remember reading in the early 1990s for example a very interesting book about the US “long depression” of the 1880s and 1890s that began with the September 1873 crash in the NY Stock Exchange. The book explored the roots of the crisis in the railroad boom of the 1860s and wonderfully invoked the famous attempt by Jay Gould and James Fisk to corner the gold market in 1869. There was however almost no reference to events outside the US except in describing how the New York crisis subsequently affected British banks. It seemed that for the authors, events in the US pretty much explained everything that happened in the US economy before and after the 1873 crisis.

It wasn’t until a few years later when I read Charles Kindleberger’s brilliant book, A Financial History of Western Europe, that I realized that the 1873 crisis was a global crisis, and that it didn’t even originate in the US. It actually began in May, 1873, with the collapse of the Vienna stock market, which spread to Berlin and London before it hit New York. I also learned that the roots of financial instability included the 1866 collapse of Overend, Gurny, a major London bank, and that stock markets around the world had soared shortly after Barings had financed the huge French war indemnity forced upon France after the 1870 Franco-Prussian War. One of Kindleberger’s great insights was that the recycling of massive payments, such as the French indemnity, often leads to liquidity-driven speculative frenzies in stock, bond and real estate markets.

Given this history, how could anyone possibly write a serious book about the US crisis of 1873 without writing at least as much about events in Europe as about events in the US? It didn’t make sense, and yet economists and economic historians do similar things all the time – they explain events in one country by referring largely to antecedents in that country. Take the Opium War in China. The standard narrative is quite straightforward. For centuries, we are told, China produced goods that Europeans wanted – tea, silk, pottery – but Europeans produced nothing China wanted, so China ran a trade surplus and accumulated reserves in the form of silver. At some point however the English discovered that it was more profitable to export Indian opium to China, which they did, and the Chinese were so furious at the poisoning of their people that they tried to prohibit it, which led to war.

But aside from the fact that it would have been impossible for China to run a trade surplus for so long, especially when the concept of reserves did not exist, the real story is a lot more interesting and complicated than that. Beginning in the late Ming Dynasty the Chinese economy was in poor shape and its monetary system was contracting relative to the growth in population, which was made all the worse because rising silver prices caused hoarding and hoarding caused rising silver prices. As a silver-based economy, among other things China desperately needed silver to re-monetize.

At first the Chinese imported silver from Japan, but eventually the Japanese forbade further exports. Around this time the Spanish began discovering silver in the Americas, and within a century were extracting huge amounts. As the price of silver in Europe plummeted relative to gold and other products, Europe discovered that they had something that the Chinese desperately wanted and which they valued far more than did the Europeans. China’s trade surplus in other words was not a trade surplus at all. There was balanced trade between Europe and China in which both sides got what they wanted.

In the 1810s Latin Americans began their wars of independence against Spain, one consequence of which was a collapse in silver production and a surge in European silver prices. When this happened England could no longer afford to exchange tea for silver, so they switched to opium, which they obtained from India at least partly in exchange for textiles, having pretty much demolished the more efficient Indian textile industry in the 18th Century. This loss of silver imports put enormous pressure on the Qing treasury and led ultimately to the sequence about which we are so familiar.

The point is that you cannot really write about the origins of the Opium War without including the very important role of the Latin American wars of independence, and yet few historians do. These kinds of sometimes-surprising global links are even more important today. Brazil and Australia had booming economies during this century, for example, but how many people know the role of artificially low Chinese interest rates in creating the boom? It is not a coincidence that the boom in both countries has ended just as the amount of interest rate repression in China has almost disappeared. It had to happen.

It is possible for Spanish economists, to take another fairly obvious example, to engage in a furious and highly politicized debate about the domestic policy distortions that “caused” the country’s savings deficit that exploded shortly after it joined the euro (one side blames lazy workers for high wages and the other side blames greedy bankers for dumb lending) without acknowledging that both high wages and risky lending might be, and in this case certainly are, the consequence of policies in Europe which the Spanish economy was unable to absorb in any other way. You cannot talk about savings distortions in one country without discussing the opposite distortions in another, and yet economists do it all the time. They usually prefer to base their explanations on an attack on their ideological enemies or a defense of their ideological friends than on the very obvious arithmetic of the balance of payments.

Economists also too easily enjoy the pleasure of moralizing. It should be very easy, to take yet another example, to understand why China has the highest savings rate in the world. Most economists don’t. Instead they refer knowingly to Chinese household frugality, based on Confucian values, even though Chinese household savings are pretty normal and the increase in household savings is a very small part of the total increase in savings (probably because in the US total savings are importantly a function of household savings, so everyone assumes this must be true everywhere).

China’s extraordinarily high savings rate is almost wholly explained by the transfer mechanisms that subsidized rapid growth over the past two decades, leaving Chinese households with the lowest share of GDP in the world, and perhaps the lowest ever recorded for a large economy. Arithmetic, not to mention historical precedents, can easily explain why these transfers, which during this century amounted to as much as 5-8 percent of GDP annually, would drive down the household consumption share of GDP by driving down the household income share, and of course high savings are simply the obverse of low consumption.

The preference of economists, not to mention other kinds of experts, to attribute China’s high savings rates to Confucian values is all the more strange when we remember that just fifty years ago East Asian countries tended to have very low savings rates, and moralizing economists then had no trouble blaming Asia’s seemingly intractable poverty and low savings on Confucian values, which for much of Chinese history had been criticized for encouraging laziness and spendthrift habits. Economists want eagerly to assign virtue or vice, but sometimes it is easier simply to stick with arithmetic.

When we speak about the Chinese economy, we then run into another problem that seems to beset a great deal of economic analysis. Policies that affect the savings rate of a small country can have more-or-less predictable domestic impacts because the closed system within which it operates, the global economy, is so large that domestic policies are not affected by external constraints. But when you are thinking about a large economy, you have to change your analysis. In a globalized world anything that changes the domestic relationship between savings and investment must automatically change the relationship between savings and investment abroad in the obverse way, and that the changes may be constrained by the relative size of the closed system within which the open system. If the savings rate of Spain (the open system) declined after 2003, as it did, the reason may have as much to do with Spain as it has to do with someone else within Europe (the relevant closed system within which it operated) – Germany, in this case – and so trying to resolve it by “undoing” the Spanish “cause” may be useless, or even reckless, as I think we in fact are seeing.


2.) I’m dying to know your thoughts on the Keynesian vs. Austrian debate on monetary policy? Do you find yourself lining up with doves like Janet Yellen who believe low interest rates are good for employment or people like Ron Paul and Stanley Druckenmiller who worry about price distortions and asset bubbles?

There is as you know a political divide between economists. One group focuses primarily on managing demand to prevent the underutilization of labor and capital (often called Keynesians). The other insist that it is only by increasing savings, which usually means increasing wealth inequality and allowing the benefits of growth to “trickle down”, that we can generate the increases in investment that drive long-term economic growth (often called supply-siders, or Austrians, although for some reason true Austrians seem to loathe supply-siders).

The point to remember is that rising inequality or, especially in countries like China, a declining household share of GDP, tends to force up the savings rate and to reduce consumption, which sometimes even lowers the investment rate, as we saw in Germany during this century. But because globally savings and investment must always balance (another accounting identity often forgotten in the debate), the tendency to force up the savings rate in any country must automatically be balanced by an increase in investment, an increase in consumption elsewhere, or an increase in unemployment. This is just a matter of logic.

Because of the political divide between supply-siders and demand-siders, most economists either oppose any and every policy that increases the savings rate through greater wealth inequality, or oppose any hint of demand management, especially if it involves fiscal spending. It turns out however – once again using little more that simple accounting identities – that there are conditions under which either supply-side policies or demand-side policies will increase long-term wealth. In fact Keynes, Hayek, and the rest of them understood quite well what those conditions are.

To simplify enormously, when productive investment in the US is constrained by insufficient domestic savings (and an inability to import enough foreign capital to make up the difference), supply-side policies can genuinely create wealth that trickles down to the general population. In the United States during much of the 19th Century, for example, an erratic and unstable financial system combined with the huge infrastructure needs of a rapidly expanding continental economy meant that the US was almost always in short supply of capital. To a large extent the US growth rate, which depended on increases in productive investment, was constrained mainly by British savings, and much of this was the consequence of high British income inequality, as John Hobson pointed out.

It is not a coincidence that just as the Chinese were suffering the consequences of the global silver shortage, in the form of the First Opium War in 1839, the US itself was in the throes of its own crisis. In 1837 a number of states, most shockingly Pennsylvania, defaulted on their debts, beginning a very deep depression that lasted for years (and, perhaps not surprisingly, is generally described in history books with few references to Latin American silver production or Chinese wars over opium). In the 19th century anything that caused the American (or British) savings rate to rise allowed US investment to expand and the country to grow.

When the world is suffering from insufficient demand, however, clearly the problem we face today, income inequality and excess savings are the problem, not the solution. There may be plenty of good investment that are not being funded in the US, but the reason they suffer from lack of funding, unlike in the 19th Century, is not because capital is to scarce or too expensive. Capital is actually too plentiful, and this shows up in the speculative flows that have driven global stock and bond markets to unreasonable levels. It is weak demand or political gridlock that prevents productive investments from being made.

So, I would argue, today we are very obviously in a “Keynesian” world of structurally weak demand, in which policy must be aimed at increasing either consumption (reducing savings) or increasing productive investment. It would always be preferable to do the latter, but it is politically very difficult to increase investment in US infrastructure through higher fiscal deficits, and of course the private sector is reluctant to increase investment, especially in manufacturing, without a revival in consumption. Washington is absolutely correct, in my opinion, to want to boost American consumption, but the Fed seems to be trying to boost consumption by igniting another asset bubble in the hopes that, like before 2007, Americans will feel “richer” and so will consume more. This isn’t sustainable, however, and will leave us, as Paul and Druckenmiller fear, even more heavily indebted and more dangerously exposed to the underlying weakness in demand.

Unfortunately this analysis leaves us with policy recommendations that are unpalatable to both sides of the aisle. The US government must take the lead in rebuilding US infrastructure, which probably means increasing government debt (although it also means reducing the debt burden by increasing the value of the economy by more than the increase in debt). The US must also increase US consumption, however not by igniting another asset bubble and letting credit cards work their magic.

There are really only two ways to increase household consumption sustainably. One is to force a redistribution of income from the richest Americans to the rest. The other is to impose trade tariffs or, what amounts to the same thing, to tax foreign purchases of US assets, especially US government bonds, in order to drive down the current account deficit and so allow the US to retain a larger share of what has become the most valuable commodity in the world: demand. Needless to say it is hard to imagine either political party, or anyone associated with either the supply-side or the demand-side ideology, signing up to the whole program.


3.) Do you think there is a global currency war going on?

Of course there is. Historically whenever global demand is weak, and unemployment high, countries will try to gain a larger share of that demand by reducing wages or otherwise taxing households to subsidize production (devaluing the currency is just a way to tax the consumption of imports and to subsidize exporters). Unfortunately these policies reduce demand further by reducing real household income and, with it, the amount households can spend. This is why in the 1930s these policies were referred to as beggar-thy-neighbor policies. In effect they forced countries with high unemployment to respond to weak global demand with policies that reduced their own contribution to global demand while grabbing a larger share of the smaller total.

But we must remember that they are not doing this to be pests. In most cases they have little choice. In a world with few constraints on trade or capital flows, if you try to raise domestic consumption by raising household income – for example by raising wages – your contribution to global demand will indeed rise, but your export competitiveness will decline, and so you may retain a smaller share of that greater amount.  In a globalized world, without a globally coordinated no-cheating boost in spending, beggar-they-neighbor policies may be systemically crazy but they are individually rational.

And they are always rationalized in exactly the same way. Countries try to force down wages, devalue their currencies, and otherwise increase the short-term, competiveness of their economies only in order to protect themselves from the depredations of others. Spain wants to force down workers’ wages today because German wage growth was cut by more than one-half in the decade after the turn of the century, even though the German economy was growing faster than it had in the decade before, and the creation of the euro was supposed to make everyone richer. If Spain succeeds, global demand will drop but Spain’s share will rise.


4.) You talked a little bit about the future of currencies in your book. In the book, you seemed to think the Euro might not survive and the dollar would continue to be the world’s reserve currency. Is that an accurate depiction of your views or not?

The US dollar will remain the world’s dominant reserve currency for a very long time, partly because it is the only currency that exhibits anywhere near the needed level of credibility, mobility, and low transactional costs, and mainly because for all the huffing and puffing about “exorbitant privilege” no other country is willing to pay the considerable cost of allowing its currency to be accumulated by foreign central banks whenever these countries experience weak domestic demand. The only way this will change, I think, is if, and perhaps when, Americans decide that they are no longer willing to enjoy the “exorbitant privilege”, and Washington imposes restrictions on foreign purchases of US dollar assets, as was the case until the 1960s.

Five years ago I would have told you that this would never happen, but two things seem to have changed. First, as Americans become increasingly aware that when foreign central banks amass hoards of dollars and prevent others, including the Fed, from reciprocating, they aren’t doing the US any favors (and if they were, why are they so determined to prevent other central banks, including the Fed, from returning the favor?). Their purchases are aimed at boosting domestic employment, and unless productive investments in the US are unfunded because of a savings shortage (which is all but impossible to believe), their purchases must result either in an increase in US debt or an increase in US unemployment. This may sound surprising to many people, including, shockingly enough, to many economists, but is actually quite easy to prove, either by using balance of payments arithmetic or by looking at the historical precedents.

Second, it seems to me that the US is becoming increasingly isolationist, largely because it is increasingly uncertain that the benefits to the US of a US-dominated world order still exceed the costs. When the US comprised a much larger share of the “globalized” part of the world, it retained a greater share of the benefits of a stable trading environment and it cost less to maintain that environment. As the US becomes a declining share of the globalized world, the costs of imposing stability (and I have no illusions that this is done for charity) rise, and its share of the benefits decline. It is only a matter of arithmetic that at some point the costs will exceed the benefits.

As a committed internationalist I know of course, and worry, that any withdrawal of US leadership – political, military, or financial – will be painful and chaotic in the short term for the rest of the world, and especially the developing world, which is why it must be such a slow and difficult process. But many Americans believe that the US would be better off if it withdrew from its foreign commitments and maintained its strength, and its virtual invulnerability at home, except from the kinds of terrorist attacks that are anyway more likely, not less likely, to be a consequence of foreign meddling.

Will the US act on its growing isolationist impulses? Eventually it must. But as President Obama knows better than anyone else, Americans want the US to be less entangled abroad, but paradoxically they are also very critical of any of the resulting chaos that is the inevitable consequence of the US turning inwards. There was, on that note, an editorial piece in July in the Wall Street Journal about the Ukrainian crisis that seemed to exemplify that paradox.

Much of the piece made sense to me – although I find very parochial the American tendency always to assume that much of what happens in the world happens only because the US permitted or did not permit it to happen, as if other countries are incapable of generating history on their own – but the argument that a certain disagreeable outcome today was the inevitable consequence of the failure of the US to draw some specific line in the sand during some preceding and seemingly unrelated event three months ago, or three years ago, or whenever, if taken seriously cannot help but lead the country into one hopeless mess after another. There was one paragraph that for me was especially revealing about the difficulty Obama, and any other president wanting to disentangle the US from the world, inevitably faces:

If this doesn’t wise the world up to Mr. Putin, you shudder to think what it might take. Mr. Obama spoiled the moment by in the next breath calling for a cease-fire and “a political solution” in eastern Ukraine, reverting to his default mode: a constitutional scholar lost in a world of thugs, to borrow a phrase from the late Fouad Ajami.

I was curious as to what kind of president the author thinks would best serve the US in a world of “thugs”. I suppose Obama himself could have also been a thug, and then he certainly would have been able to handle himself with glamorous equality in the Ukrainian conflict, perhaps by sending troops, but its hard to imagine that the US or the world, over the longer term, would be better off with more of a Putin style in the White House. I can’t even imagine how Russia is better off with Putin in the medium term, and I think it is almost a no-brainer to suggest that the next couple of decades are going to be a very tough decade for Russia, especially if all its neighbors decide that major military expenditures are a good idea.

I suppose instead of a thug or a constitutional scholar we could have been led by the proverbial “man on the white horse” who charges gallantly into the fray and fixes things, but that man usually turns out to be either a thug or an idiot. One of the most famous men on a white horse in history (Napoleon I guess is the exemplar), is General Boulanger, who many Frenchmen, sick and tired of the hopeless mess France – still reeling from the Prussian defeat and on the verge of the Dreyfus Affair – seemed to have become, turned to in the years before 1889 to solve France’s problems. Boulanger of course turned out for all his charisma to be a mediocre leader and a miserable failure, who committed suicide within a couple of years of his defeat, and unfortunately this is all too common a fate for men on white horses.

So what is the alternative? I wonder if a very unglamorous constitutional scholar might not in the long run be exactly what the US and the world needs for the US to extricate itself gradually from some of its global commitments. There is no question that it will be a messy process, and that there are many things that will go wrong, in which case a careful, cautious president who avoids grand gestures and insists on legal niceties might be the leader most likely to pull it off at the minimum long-term cost.

Either way, isolationism will be messy for the US and messier for the world, but the alternative might be worse for both if a US withdrawal eventually occurs, and occurs when the country is economically weaker and forced by circumstances to withdraw. That is when thugs will do especially well. So far, in spite of the greater visibility of sheer spite in the political debate, the US continues to be the kind of country in which a foreign crisis causes people to rally behind the president, whatever else they may think of him. This is a huge advantage that many countries don’t have, and although some Americans are eager to undermine this instinct, I think it is pretty firmly embedded.


5.) In the book, you talk about the European economy and your belief that the EU will likely eventually need to break up. I totally agree. Can you talk about why Spanish and Italian bond yields have fallen so low recently and do you think it can possibly continue? What effect have the ECB’s LTRO programs and Draghi’s hints and pledges of QE had? Are Europe’s leaders correct to be spiking the football and proclaiming that Europe is saved…or do you still think that European leaders will ultimately be unable to make the adjustments that you say in your book that Europe must make?

This is why I am worried about the long-term prospects for the euro. Europe, in a sense, suffers from a contained version of the global weakness in demand and the consequent imbalances. When German wage growth was forced down during the last decade, it caused, or at least accommodated, a rise in the German savings rate (which is the same as a decline in the German consumption rate) and, by the way, had nothing to do with an increase in the fabled thriftiness of Germans, which makes it strange when economists use the rise in German savings to moralize. The same process also accommodated or even caused a decline in German investment.

As German savings were forced up beyond German investment, by definition it had to run a large and growing trade surplus, and for a variety of fairly well-understood reasons this surplus was always likely to be balanced within Europe. Without the ability of smaller European countries to intervene in intra-European trade, or to manage an independent monetary policy, the only possible response, as in the global case, was a rise in the indebtedness of peripheral Europe or a rise in unemployment. We saw the former before 2008 and the latter after.

In 2008 I argued that unless Berlin were willing to lead a European response, centered on a sharp rise in German demand, something Berlin didn’t want to do because it would cause either their debt to grow or their export competitiveness to be undermined, peripheral Europe had only two options: break up the euro, or suffer punishingly high rates of unemployment for a decade or more. So far that analysis seems to have been correct, and Europe seems to have chosen the latter.

But with extreme right-wing parties scooping up votes by baying for the blood of bankers, demanding a withdrawal from the euro, and blaming foreigners – whether immigrants, the US, or China – for their malaise, it isn’t clear to me how long these countries can continue to choose unemployment. That is why I always insist that the most important person in Europe might be not Angela Merkel but Marine le Pen. Merkel wants Europe to continue choosing unemployment, at least until the German banks are sufficiently capitalized to withstand defaults, but le Pen might force Europe to choose to break the euro.

As for why rates are so low, the answer I think is pretty obvious and widely understood. With low or negative economic growth, a serious threat of deflation, and the willingness of the ECB to do “whatever it takes” to prevent a suspension of debt payments, which would bring down both the German and the French banking systems, investors have been given lots of liquidity and assurances that the ECB will step in whenever rates get high enough to threaten the ability of countries like Spain to mange their debt burdens. A lot of investors refer to this quite openly as the “Draghi put”.

The official reason for these policies is that eventually these countries will “grow out” of their debt burdens, but this is what they always say and it almost never happens. Rates will stay low either until the German banks have managed to recapitalize themselves enough to withstand sovereign-debt restructuring (after which the ECB commitment to do “whatever it takes” will almost certainly disappear), or until investor confidence, sapped by the irresistible and unending growth in the debt burdens of these countries, disappears. Because it will take many years for the former to happen, I assume it will be the latter.


6.) Though The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy was published just last year in 2013, in today’s fast changing world (and 24 hour news cycle), that might seem like an eternity ago. You just talked about Europe. How do you feel the rest of the world (the U.S., China, Japan) have done in taking the steps necessary to rebalance global trade and the global economy?

The US was fairly quick to begin the adjustment process, as it always is, perhaps because the American political system can more easily absorb the social consequences (which is a polite way of saying that the US can treat its poor badly and get away with it), but now it might be backtracking. Worsening income inequality all but guarantees, I think, that we will not see sustainable consumption growth for many years, and political gridlock makes the rollout of an infrastructure-improvement program unlikely. I do think that because of its flexibility and creativity the next decade might still be relatively good for the US, however, but any recovery can be postponed or even derailed by events in Europe or elsewhere. At some point, as Americans have always done in their history when income inequality got out of hand and the economy was in the doldrums, there will be a reversal of income inequality driven by politics, although this reversal will probably go, as it always does, too far.

Away from the US, we have also needed to see rebalancing in Europe, China and Japan of course. I have already explained why I think Europe faces many more years of high unemployment, and as for Japan, I really have no idea of how Tokyo will address its debt problem. As long as growth and interest rates are close to zero, we can all pretend the debt burden is sustainable, but any sustained nominal GDP growth will force Tokyo into a tough decision on interest rates. They can keep rates low, in which case the great reversal of the Japanese imbalances of the 1980s will itself reverse, and the Japanese consumption share of GDP will weaken (and investment probably will too in response), which means that Japan will depend even more on foreign demand to keep unemployment from rising.

Or Tokyo can raise interest rates, in which case debt costs will quickly become unsustainable, although I think government liabilities are long enough in duration that Tokyo will have a few years to adjust. Basically if Japan could resolve its debt burden at the expense of anyone but ordinary households, I think it could start to grow sustainably again, but I don’t know enough about the Japanese economy to know if that is even possible. I hate even to discuss the rise of military tensions in the region, but it would be foolish to deny that this could be a way out of a politically difficult adjustment, for more than one country.

Finally, among the major economies, Beijing has eliminated most of the main mechanisms that drove China’s very healthy growth in the 1990s but which resulted in the deep imbalances of the past decade, along with the country’s surging debt burden. But that is just the first of two steps. It now needs to take the next, politically more difficult, step of liberalizing the economy by eliminating many of the constraints which favor politically connected businesses at the expense of China’s small and medium enterprises, increasing the household share of GDP, and paying down the debt, although if it monetizes the debt or otherwise forces households to absorb the losses, which is what happened after its last debt crisis in the late 1990s, consumption will not be able to grow fast enough to bail out the economy.

India is for me sort of a wild card. Among the major economies it is the only country besides the US not to suffer from truly awful demographics (not that US demographics are good, but at least they are not nearly as bad as those of Europe, Japan, Russia and China, thanks mainly to immigration), and like the US it has a great source of sustainable demand in the upgrading of its infrastructure, but when it comes to organizing the political ability to do so it is in worse shape than even the US. I am no India expert, but my Indian friends tell me that their combination of a highly entrenched and brutally constraining bureaucracy and the determination of a growing segment of the Indian population to turn one of India’s greatest strengths, their impressive diversity, into a source of violence and instability, may trump their many advantages.

As for the rest of the developing world, including Africa, high commodity prices always revives enthusiasm and hope, and low commodity prices, which I expect, always dash it. I hope this time is different.


7.) In your books, you seem careful not to directly blame China for the global imbalances, but you do mention how different countries’ domestic policies contribute to the global imbalances. As a professor at Beijing University, what Bill Clinton once called “China’s Harvard”, do you ever feel any pushback from your contacts here in China regarding some of your criticisms of government policy?

I get that question a lot, and I think it is because many foreigners overestimate the degree of control that authorities exercise over public discussion. It is not that there isn’t control. Of course there is, and there is some evidence that things have tightened up in the past year or two, but as long as you do not cross certain lines, the debate within China can be quite vibrant.

I think there may be a misperception about why I don’t “blame” China. As I see it, China imposed a series of necessary and very difficult reforms in the 1980s, followed by an investment-led growth policy that had proven successful for many, many countries in the last 100 years, but like every one of the countries that had a similar “growth miracle”, it also developed deep imbalances and waited too long before it began the rebalancing process (all rapid growth, as Hirschman taught us in the 1960s, is unbalanced, and the imbalances must eventually be reversed). This is why I didn’t think it made sense to excoriate China. China was simply following an historical process that many developed or middle-income countries, including the US, have followed, and now it faces the challenges that some overcame and some didn’t.

Given the very touchy nationalism that exists within China, of course I was criticized by some Chinese, although because I don’t really criticize government policy so much as try to describe systematically the Chinese economy and place it as firmly as possible within its historical contexts, ultimately their criticism can only be that I failed to believe that China was gloriously exempt from historical processes. While some Chinese are easily angered at any suggestion that China’s development process faces risks, or at least they used to be, it is hard to credit them with much intelligence.

Most serious Chinese, economists or not, recognize that someone whose work consists of trying to analyze China’s development process by comparing it to that of other countries that have followed the same development path, and describing where things have gone wrong and how these pose risks for China, can hardly be called anti-China. My students at Peking University, for example, are extremely supportive and think very differently about what I do, and I think I have convinced them that as future policymakers, especially in finance and central banking, rather than join the hype that has always accompanied every growth miracle it is their responsibility to be focus on risks and on all the ways things can go wrong.

But I have to say that it was not just aggrieved Chinese nationalists who were angry at me. I have been far more criticized by foreign economists, especially sell-side analysts and “China experts”, not so much for failing to support the overhyped nonsense that was the consensus for many years, but rather because I suggested, perhaps even a little rudely sometimes, that the consensus was such obvious nonsense, and would have been rejected as absurd, as it has, by anyone with some knowledge of economic history, or of the experiences of other developing countries, or even of how balance sheets work. While these analysts were diligently compiling reams of data and processing them with all the resources Wall Street can muster in their competition to see who could come up with the most optimistic possible prediction, I – and, I should add, a number of other economists – rejected their work as being useless and, what was worse, useless in a fairly obvious and predictable way. Most of them loved their mathematical models, but were not sophisticated enough mathematicians to understand how their models worked and under what conditions they were likely to fail.

We have seen a general backlash against the use of math in economics, but we have to be careful. It is not that math is useless. It is that mathematical models imbed lots of assumptions that, if they are not understood, make forecasts useless, especially when we most need them, because when imbalances are being generated, the relationship between variables are likely to be distorted in on direction, and when the economy rebalances, the distortions will flip their signs (i.e. positive biases become negative and vice versa). Our predictions are always right, in other words, as long as nothing happens, but whenever something major happens our predictions are automatically wrong. In any economy where there is more likely to be distortion, or where automatic adjustment mechanisms are weaker, we need to be extra cautious about the assumptions underlying our models. China is clearly such an economy, but like the drunk man searching for his car keys, we prefer to search where the light is better.

But touchy nationalists and sell-side analysts aside, I never felt any pushback from Peking University or from the authorities and no one tried to prevent me from analyzing and writing about the economy. On the contrary, I think many Chinese economists, both among policy makers and among their advisors, have always read what I wrote very sympathetically and many agreed with my views, often coming to them long before me. In fact if you read between the lines it is pretty obvious that as far back as 2007 many policy advisors in Beijing, along with Premier Wen, understood far better than most economists writing about China the kinds of imbalances that China was generating, and how difficult it was going to be, especially politically, for the adjustment process to take place.

There was always a popular myth among foreign China bulls, and it still exists today to some extent, that any skepticism about the Chinese growth miracle marked you out as a misguided foreigner, because every relevant Chinese economist agreed fully with the ecstatic hype that the press and the sell-side were saying about China. But this was never true. You were far more likely to see skepticism and even serious concern among Chinese economists than among foreign economists. How could you not? Many of them were not eagerly selling the bull pitch and were only interested in understanding what was happening in their country.


8.)  In another of your books, Avoiding the Fall, you mentioned that you expected that Chinese economic growth would not be steady in the future, but that China would likely avoid a hard landing. There’s a lot that goes on here behind the scenes in China. Sometimes, the government can be quick to take action. Other times, they can be a little slow. Has the new leadership of Xi Jinping and Li Keqiang impressed you with the actions that they have taken to try and rebalance China’s economy for the future?

Because I, like all but a group probably no more that 50-100 people, have no idea about what exactly is happening within leadership circles, I can’t really answer except to say that on the surface President Xi and Premier Li are doing pretty much what we would have expected if China were to embark upon a successful rebalancing – one which would, of necessity, be opposed by what in China are referred to as the “vested interests”. Given the opacity of the system of course we must always be prepared to find our assumptions wildly mistaken, but on the surface it looks like the Xi-Li administration is working its way successfully through what will nonetheless be a very difficult process.


9.) How confident are you about the global economy in the short-term, the medium-term, and the long-term (bearing in mind that Keynes famously once said that, “In the long run, we’re all dead.”)

Not to be flip, but when JP Morgan was asked to predict the direction of the stock market, he is supposed to have replied “It will fluctuate”. As good enough an answer as that was, I would add that in the past 200 years whenever we have had a global crisis, we seem to lose confidence in ourselves and begin to lambaste democracies and decentralized economic systems for their inefficiencies and their inability to implement the “right” policies quickly and forcefully. I just read a recent Econintersect piece, for example, that starts right off with “The global brand of dictatorship is making a strong comeback in the democratic world.”

But it did in the 1930s too. Let’s not undervalue the inability of decentralized political and economic systems also to implement the wrong policies quickly and forcefully. Decentralized systems tend to correct mistakes relatively early, and do a pretty good job (or maybe a terrible job, but better than the alternatives) at economic adjustment. Growth always creates imbalances, and the important part always turns out not to be how quickly we grew during the good times but rather how successfully we adjusted from the imbalances, especially because the adjustment usually takes place during the bad times.

This is why the political, legal, social and financial institutions that constrain the adjustment process for each country are so important. Not all growth miracles, for example, are followed by successful adjustments and more long-term growth. In fact they rarely are. In the 1960s it was widely “known” that the USSR, then completing nearly two decades of phenomenal growth, whose exploits included the first manned satellite and the first space walk, would almost certainly overtake the US both technologically and economically by the end of the century.

Today those expectations seem almost comical. The country had wracked up so much debt during the late stages of its growth miracle, and for all its spectacular growth was unable to deliver more than a minimum amount of consumer products to it citizenry (it is considered shocking to say this in polite company, but consumption-driven economies seem to be far more innovative and productive that investment–driven economies, perhaps because of the decentralization of demand). By the late 1980s, when I started my career as a trader of defaulted and restructured sovereign debt, Russian debt was widely considered to be part of our market and had only not been formally restructured because foreign banks agreed to roll over principal and interest payments in order to maintain the fiction that it could repay at will.

Brazil was another miracle – indeed the first country to be called a “miracle”, I believe – whose astonishing growth ended in the early 1980s, after which its relative position in the world retreated until soaring iron ore prices a decade ago reignited the boom. Beginning in the late 1950s Brazil had followed a consumption-repressing, investment-driven growth model different from that of China’s mainly because consumption was repressed not with hidden transfers but rather with high explicit income taxes. It was able to achieve growth rates that exceeded 10% annually for well over a decade, but when the inevitable investment misallocation and fraudulent spending began to exhaust domestic debt capacity, the oil shocks of the early 1970s, which created the urgent need to recycle burgeoning petrodollar reserves, gave Brazil a second lease on growth. Brazil – and the rest of Latin America, I should add – then grew rapidly through the rest of the 1970s on borrowed dollars, even though the US economy, and the European to a much lesser extent, was in a severe recession (prompting, for the first time, I think, confident assertions that the developing world, had decoupled from US demand).

Many other countries have had investment-driven growth miracles in the past sixty years. A few of them, like Japan, were already developed countries with advanced institutions, which is perhaps why the belief in the late 1980s that it would inevitably overtake the US before the end of the century as the world’s largest economy seemed so credible.

Other countries, like South Korea, were among the poorest and least developed in the world. All of the growth-miracle countries that I can indentify, however, ended their miracle periods either with painful debt crises or with “lost decades” of stagnant growth, and all went through difficult transitions, some cases of which were followed by further growth miracles and most were not. But very few countries have gone from backwards economies to advanced economies. It is worth noting that excluding city-state trading entrepots like Hong Kong and Singapore, and a few oil sheikdoms, both of whose growth models cannot be replicated by most countries, the only two unquestionable success stories I can think of are South Korea and the province of Taiwan, both of whom grew most rapidly during the Cold War, when their economic success was considered to be vitally important for the US. Chile may be the third country that joins that limited group.

Rather than make wild predictions we need to understand who so few countries have actually made the transition from poor to rich. My explanation has to do with the kinds of institutions that permit adjustment, and perhaps you can find similar explanations by people like Daron Acemoglu and James Robinson, to whose work I often refer, but whether I am right or wrong, the fact is that any prediction of success that doesn’t first explain why there has been so much failure is a waste of time.

And contrary to the popular press, China is probably not the fastest growing country in history. That prize probably belongs to Argentina in the four decades before 1914, but the subsequent decades nonetheless turned out pretty badly. There is a furious debate on where Argentina went wrong. Some argue that Argentina’s relative decline began with the Uriburu coup in 1930, after which it seemed that the main role of government was to disrupt economic liberalization and income redistribution and unassailably to protect the existing elite. Others blame Juan Peron, whose presidency in the 1940s and 1950s entrenched a near-autarchic state-corporatism, which some would call fascist. Finally others argue that Argentina’s decline only really occurred in the decade that began with Peron’s death in 1974, followed by the 1976 coup that established the right-wing administration of Jorge Rafael Videla. Nearly all the explanations stress the breakdown of civil society, the entrenchment of the elite and the resistance to income redistribution. This might be a lesson worth learning for China and other developing countries.

For all the many cases of growth miracles, or of debt-fueled consumption-driven advances, like that enjoyed by Spain in the years before the 2007-08 crisis, economists seem incapable of placing whichever is the latest example within a proper historical context. We are always surprised when an economic miracle stalls, and even when that happens, in spite of the many precedents, we are always shocked by how painful adjustment turns out to be (I cannot find a single case in history in which even the most pessimistic of skeptics did not understate significantly the amount by which growth would slow), and it takes years for us to consider that the adjustment period might not just be a temporary setback, during and after which the miracle country will sill grow relatively faster than the rest of the world.

I am sorry to say that none of this tells us much about future growth in China, the US, Europe, or the rest of the world. What it tells us is that rapid growth is always unbalanced growth, and many years of rapid growth are nearly always derailed by debt. It also tells us that relative performance in the past doesn’t help us predict relative performance during the adjustment period or even after the adjustment period. Either way we’ll just have to wait and see how the US and different countries in Europe and Asia adjust from the great imbalances of the past two decades. Global economic growth, to steal JP Morgan’s prediction, will fluctuate.


10.) Can you talk about deflation? Some say that deflation causes consumers to persistently put off purchases while they wait for prices to fall. I feel this violates everything we know about what happens to demand when prices fall. But if prices do fall in a prolonged deflationary period, it would make debt repayment much harder and make defaults more likely. What are your thoughts and what effect would wholesale debt restructuring have on both wealth and economic growth? What is better for average people: trying to slowly inflate away debt or global debt restructuring?

It really depends on the circumstances. I am not an economist so much as a balance sheet guy, and I can tell you that inflating debt, or monetizing it in any other way (e.g. financial repression) simply transfers wealth from those who are long monetary assets (usually households) to those who are short. Deflation does the opposite.

Generally speaking I would argue that in most countries we need to boost the wealth of median households at the expense either of the state or of the economic elite, but in the case of the latter I also recognize that we have to do so carefully. Income inequality may itself be the outcome of a highly desirable incentive structure that rewards innovation and entrepreneurialism. I know this answer is sort of a copout, but the specific circumstances of each country matter, and I don’t want my having gotten a few things right in China to tempt me into trying to punch too far above my weight.


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  1. Estimado profesor Pettis: un hecho ignorado por la historia económica incluso dentro de Argentina es el enorme efecto que tuvo sobre nuestra economía el “default” de la deuda inglesa contraída durante la guerra que se disfrazó como “incovertibilidad de la libra” y obligó al Gobierno Argentino a “comprar” bienes ingleses ampliamente depreciados cuando no inservibles tales como los ferrocarriles.

    • For those who don’t speak Spanish, Domingo is arguing that what is often forgotten is that Argentina was hugely impacted by the effective English “default” on its war obligations (I assume Domingo means WW1) when England suspended gold convertibility at the beginning of the war, as did most of the belligerents, and suffered enormous inflation during the world, with its price index rising to roughly 240 by the end of the war and 300 by 1920 (1913 = 100), before it deflated its way very painfully back to par by, I think, 1925. It was forced off gold again in 1931.

      Europe, the US, and other pats of the world (Argentina, Brazil, Mexico, Japan, China, Turkey, etc) were caught in a web of financial claims and counterclaims all underpinned by wholly unrealistic reparation payments that were imposed on Germany, and in the end most of it was defaulted on or written down in the 1930s. I think the last German reparations payments were in fact made just a few years ago.

      I am not sure of the total value of Britain’s debt to Argentina, so I cannot judge the magnitude of the impact, but generally speaking the war was very positive for the Argentine economy because as a neutral Argentina supplied enormous amounts of wheat, meat, and other products to Europeans desperate to feed and supply their armies. What is more, because the current account is the obverse of the capital account, debt forgiveness, voluntary or not, while very painful for bankers and rentiers, is not necessarily painful for producers in the creditor economy. Had England repaid the debt, remember, Argentina would have had to run a current account deficit equal to the debt repayment.

      In fact I cannot think of any creditor countries whose economies were seriously hurt by the default of their foreign borrowers. Just in the 19th Century, for example, the UK suffered major defaults after 1825 that included almost every Latin American borrower, including the fictional Central American republic of Poyais, as well as peripheral European borrowers (Greece and, I think, Denmark) and a few middle eastern borrowers. It suffered even more seriously in 1837 when several American states, including rich Pennsylvania, defaulted (if it had been a sovereign nation Pennsylvania would have probably been among the five or ten largest economies in the world), causing such outrage that a member of the Rothschild bank furiously told the US representative in London that he personally guaranteed that no American would ever be allowed to borrow in London again, and poor Charles Dickens embarked on his US trip in 1842 partly to meet his adoring fans, partly to put pressure on the US to enforce copyright laws (non-American authors were pirated with impunity), and partly to see if he could collect anything on his defaulted American state bonds.

      In 1873 the UK suffered the first truly global debt crisis when dozens of borrowers defaulted on bonds issued in London, including every borrowing country in Latin America except Argentina. Argentina made up for that with a massive default in 1890 that forced the BoE to corral together banks, including Rothschild, to bail out the UK’s oldest and most prestigious bank, Barings (and the bitter enemy of the Rothschilds) which at the time was Argentina’s lead banker. None of these defaults put much of a dent in England’s manufacturing prowess.

      I am not suggesting, Domingo, that Argentina did not suffer from the British suspension and the inflating away of the money it had lent, almost all of which was used to purchase Argentine food during the war, but in and of itself I would find it hard to believe that it explains Argentina’s subsequent decline. In fact the Argentine economy boomed through 1924 and thereafter and its foreign trade tripled by 1929. After a painful beginning of the Great depression, which I guess prompted the Uriburu coup, I believe Argentina had a pretty mild depression and because of the huge gold reserves it had accumulated it was in fact one of the few peripheral nations to repay all of its debt.

      • Estimado Profesor Pettis: le escribo en español porque mi habilidad con el inglés escrito es nula. Me estoy refiriendo a lo ocurrido luego de la SEGUNDA GUERRA MUNDIAL cuando todas las libras que Argentina recibió en pago por los bienes que exportó a Inglaterra FUERON DECLARADAS INCONVERTIBLES y a cambio se ofreció “vender” al Gobierno Argentino de Perón activos ingleses tales como los ferrocarriles que eran obsoletos cuando no inservibles. Este “default” es ignorado aún por los economistas argentinos ya que pone en entredicho la “visión nacionalista” del llamado peronismo y a los “liberales” anglófilos no les gusta recordarlo. Perdón por tocar un tema marginal en su trabajo pero me parece que en esto reside una de las claves de la decadencia argentina que de otra manera aparece inexplicable.

        • For those who don’t speak Spanish, Domingo tells me that in fact he was referring to British obligations to Argentina after WW2, not WW1. British repayments were indeed made, Domingo says, but in inconvertible sterling, so their only use was to buy British goods, and in that case mostly long-depreciated and fairly worthless British assets in Argentina — he mentions the railroads specifically. That Perón used precious reserves in the late 1940s and 1950s in a way that many considered unwise is pretty well-known, or at least often repeated, and I assume that this is what Domingo is referring to. He blames the loss of reserves a least in part on the typical anglophilia of the Argentine upper class and as evidence that Perón’s famous nationalism was more opportunistic than sincere (I am paraphrasing).

          I know Argentina quite well and I can certainly confirm that if you want a taste of the manners and habits of Edwardian Britain, you are probably far more likely to find it in certain wealthy Buenos Aires neighborhoods then anywhere in England, with entire groups of people faithfully and lovingly replicating upper-middle-class British behavior, including the british social snobbery, or at least the version presented in Hollywood movies of the 1930s and 1950s (in which it seems for some reason that everyone, even gardeners, knows the Eton Boating Song).

          Many economists have argued that Perón’s “populist” misuse of the reserves was the beginning of the end, so perhaps Domingo has a point, but in that case I would suggest that the waste of the reserves was not the main problem but a symptom of the bigger problem, which was that Perón and other populists have undermined institutions and squandered wealth, at least in part because of the huge resentment that exists in Argentina between the rich and the poor.

          Gracias, Domingo

          • As an Argentine lawyer who is taking an MBA degree in the US, I can tell you that, in legal circles, some scholars date the genesis of Argentina’s decline all the way back to 1922, the first time when the Argentine Supreme Court, which up to then was heavily influenced by US Supreme Court precedents, was unable to strike down a law that restricted property rights (a 2 year freeze on rents). That started a long slippery slope that much later ended with the Court convalidating the most gross restrictions on property rights, a tendency that has since never stopped.

            I find impressive how much you know about Argentina’s turning points (1930, 1946 and 1974). What I find hard to understand with explanations that place the blame for Argentina’s decline on certain presidents, is why the overall trajectory did not change once those leaders were out of power, often being replaced by their ideological opposites. For political reasons, what none of them (all of them, irrespective of ideologies) could do was to reverse the steady erosion of property rights which came in the guise of populist laws.

            The safeguards on property rights protections set in Argentina’s 1860 Constitution, perhaps the most stringent of any constitution ever, did much to spark the spectacular growth of the 1880-1923 period. Those protections were placed by our founding fathers, who had dealt with a 19th century version of populism, caudillism; to the point that some people argue that Argentina has never bridged the divide between its institutional and populist periods, which alternate through history. Some people even think that the only reform Argentina should undertake is a judicial reform, since the institutional framework for another growth cycle is already present in our Constitution, which only needs to be enforced.

            Looking forward to taking your course at Guanghua during my term abroad,


          • Ignacio,

            Would you say that the opposite of socialism fascism? I wouldn’t. They’re both authoritarian and provide a country little optionality.

            One of the problems with authoritarian government is that changes don’t happen often and the changes that do happen occur in a centralized manner whereby the gains are small and consistent while the losses are hidden in the tails. Basically, I’m saying that volatility gets suppressed.

            What does volatility suppression imply?
            It means that on the surface everything looks good and the system shows no visible risks. Countries with authoritarian systems usually get locked into certain policies with little ability to adjust. In other words, the systems shows no visible risks while it’s actually more at risk of blowing apart. Such political systems have a much lower turnover (and appear much more stable) that more free political systems, but when the turnover does happen, the consequences are much more devastating.

          • I’d like to add I know nothing Argentina, but what you and Prof. Pettis have written, that’s the vibe I’m getting. The main problem to me seems like authoritarianism.

          • Estimado Profesor Pettis: traigo este tema a su atención porque en 1947, Argentina fue “obligada” a transformar SU PRODUCCION AGROPECUARIA DE UNA DECADA en una montaña de chatarra con forma de sistema ferroviario y pasó instantáneamente de ser UN PAIS ACREEDOR NETO a ser un PAIS DEUDOR NETO. La historia económica posterior es la historia de la ETERNA RESTRICCION EXTERNA ARGENTINA con CRISIS PERMANENTES DE BALANCE DE PAGOS (como la actual). En síntesis: en 1946. Argentina pagó “reparaciones de guerra” a pesar de no haber sido beligerante. Con ese antecedente cree Ud. que los gobernantes chinos duermen tranquilos “sentados” sobre los TRILLONES DE DOLARES QUE TIENEN DE RESERVAS?.

  2. ^^Doug Pancoast asked Michael Pettis: “Can you talk about deflation? Some say that deflation causes consumers to persistently put off purchases while they wait for prices to fall. I feel this violates everything we know about what happens to demand when prices fall.”

    A) This “putting off purchase” effect is not very strong for CONSUMPTION items because deferring consumption always has a cost. For example, if you are hungry today, the fact that food will be cheaper tomorrow may not cause you to defer your purchase, because the pain of hunger today (cost of postponed consumption) may exceed the pleasure of any savings made by purchasing cheaper food tomorrow. As another example, if your shoes wear out, the fact that shoes will be cheaper tomorrow may not cause you to defer your purchase, because the pain of hurting feet today (cost of postponed consumption) may exceed the pleasure of any savings made by purchasing cheaper shoes tomorrow. This is just as true for the common modern-day example of consumer electronics, where sales remain strong even though prices keep falling in a secular fashion.

    B) On the other hand, the “putting off purchase” effect is very strong for INVESTMENT items because there the choice is not between the gain of consuming now and pain of postponing consumption, but between two types of savings options, viz. either staying in currency or purchasing another kind of asset. For example, who will buy houses or stocks today when the EXPECTATION is that house & stock prices will fall tomorrow? In such a situation, there is no pain in holding currency today and much to gain by waiting for prices to fall further tomorrow. This leads to a asset-price deflation spiral and is what has been happening in Japan in real-estate and the stock-market for the last 25 years.

    • Thanks for giving a few examples of the blatantly obvious. Kinezi. The fact that some consumption is expensive to postpone doesn’t prove that deflationary expectations don’t have pro-cyclical impacts on consumption, with lower future price expectations causing postponed purchases (ok, not of chicken sandwiches but certainly of cars) which in turn lowers prices further. Pro-cyclicality may be one of the most obviously true and most neglected risks in economics and one of the main things I learned from Pettis. Once you learn it, it’s truth becomes so obvious, which in Princeton, we were told, marks a wise man and a great teacher.
      Check out Japan this year, Kinezi, and you should be convinced how price expectations affect prices pro-cyclically..

      • John Post wrote: “Thanks for giving a few examples of the blatantly obvious. Kinezi.”

        It may be blatantly obvious to you, John, but it might not be so to others. Please try to be more patient with those of us who might not be as blessed.

        1) We know that Japanese households are preferring to hold cash instead of buying stocks & real estate (i.e. deferring purchase of assets) because we can see stock-prices & real-estate-prices in a secular decline over the last 25 years, despite a considerable increase in the amount of money.

        2) However, there is no evidence to show that Japanese households are deferring purchase of consumption items (whether of cars or chicken sandwiches as per your example), because household consumption has been growing quite healthily over the last 25 years despite stagnant/falling prices in the Japanese economy.

        Let me know if you think I have missed anything.

        • Perhaps, Vinezi, what people are trying to say is that you should really take a deep breath and find some more useful employment for your undoubted talents. The fact is, whether you like it or not, that people get put off by your constant, cavillous interventions (interjections?) that – in whatever good faith they may be made – actually discourage other participants to this lovely and informative Blog from contributing purely in the apprehension of your infallibly immediate and often pedantic response. You may have the best intentions, but the point to economic praxis is – as Pettis is always quite keen to remind us – that the process of making decisions (the politics of it, if you like) is just as important as the outcome. So there is little point going around with GDPs and BOPs and number-crunching and whatnot as if they were bludgeons with which you could bash everyone else. Please just ease up, take a deep breath – and let people live. Cheers!

    • I checked your music website and did some research, and wow!
      So why should I be most impressed by you?
      1. Because you are probably a brilliant economist, and you’re not an economist?
      2. Because you had the arrogance to waltz into a provincial and second rate music city (Beijing) and think you could turn It into a top ten new music center within 5 years?
      Or 3. Because you have pulled it off, both for underground rock and experimental music?
      I am impressed. For Beijing-based readers who care, there are anniversaries shows at XP Friday (small club but musician heavy) and Yugong Yishan Saturday (huge club which will be packed with ecstatic partiers). Am I missing anything? Is it true New York Dolls did a very private show at your club?

      • Thanks for the publicity, Biltmore. You are right about the two anniversary shows next week. They will be wonderful shows, and I will be sure to thank Lolly (our media person) for doing such a great job of getting the word out.

        And yes, when the Dolls were in Beijing for some big festival they came to my club to hang out a couple of days before their performance. Around 2 am Sylvain asked if I minded if they got on stage and did a couple of songs. Dumb question, right? In fact they played for nearly two hours, and because it was late and on a Tuesday, after a few musicians eagerly called a few other musicians to drop everything and get to the club immediately, we ended up with a small audience of about 30-40 people, mostly musicians, in a very intimate space watching one of the best shows any of us will ever see. When you consider that, for much of the Beijing music underground, the Dolls are way up there in the pantheon, to watch them perform in that kind of setting was pretty amazing.

  3. ^^Michael Pettis WROTE: “Around this time the Spanish began discovering silver in the Americas, and within a century were extracting huge amounts….. x ….Europe discovered that they had something that the Chinese desperately wanted …… x ……There was balanced trade between Europe and China in which both sides got what they wanted.”

    On a bilateral basis, it may well have been ‘win-win’ for Europe & China, as both sides “got what they wanted”. But surely, Michael, as you have REPEATEDLY been telling us, bilateral analyses of global trading patterns are incomplete at best and misleading at worst.

    In order to get the complete picture, therefore, we should make the analysis multi-lateral and include the Native Americans. China got the American silver, Europe got the Chinese silk– so far, so good. But what did the Native Americans get?

    It seems to me that this was the production situation:
    1) The Chinese produced SILK.
    2) The Native Americans produced SILVER.
    3) The Europeans produced DISEASES.

    This appears to have been the post-trade situation:
    1) The Chinese got the American silver. WIN.
    2) The Europeans got the Chinese silk. WIN.
    3) The Native Americans got the European diseases. No win?

    PS: Surely, the Spaniards did not ‘discover’ silver in the Americas; it had already been discovered by the Native Americans and was actively being mined by them long before the Europeans arrived. Europeans did not work in those silver mines, the Native Americans did. So what was the European claim to that American silver such that they could simply “EXTRACT huge amounts” as Michael breezily puts it? Anyone?

    • Thanks VK for having the good taste to remind us that no discussion should escape political correctness, and that we should always insert the proper official emotions whenever key words are expressed, but in this case you may completely missed the point Pettis was making. The idea that bilateral capital account imbalances do not require bilateral trade settlement is both something that should be far more obvious than it is and completely irrelevant when trade is conducted bilaterally on a barter basis. In this case there are no trade imbalances and no capital flows at all except perhaps for trade financing wholly within each side of the trade.
      At first I thought your point was that much Spanish silver was delivered not by Spaniards but by English, Dutch and Filipino traders, with a miscellaneous few others thrown, and while this would have been true, it would not have been relevant.

    • I should add that your rush to political correctness was also more than a tad patronizing, as political correctness too often is (“no really, I understand how all you little brown people must have suffered!”) and fails to concede domestic social differences, imposed probably not so much at the end of a kiss as at the end of an Aztec or Incan sword, as if you were determined to prove Pettis’s contention that we cannot permit the possibility that the little brown Native Americans could create history all by themselves, and that those Native Americans who actually mined the silver and those Native Americans who were the beneficiaries of silver mining would probably not have appreciated the cavalier way in which you toss them all together.

      Yes, there was silver extraction before the Spaniards came, but it wasn’t a fraction of what came later. The Spaniards were brutal and efficient, and took silver by right of arms from the Incas (in the case of Potosi, which was considered mined out, by the way when the Spaniards “discovered” otherwise) or the Aztecs (in the case of the lovely silver towns north of Mexico DF) in the same way that the Inca and Aztecs took them. And if you want to remind us of how generous you can be, spare a thought for the children who worked the British textile mills, the British coal miners, the multinational crew of sailors, the opium collectors in India, and the tea farmers in China, none of whom were especially well treated or disease free.

      But the big point I propose is that none of this has to do with bilateral China Europe trade until silver prices rise It is just the kind if moralizing that makes us feel good which, Pettis claims, and I believe, simply confuses the obvious.

      • Charlie Tuna wrote: “Thanks VK for having the good taste to remind us that no discussion should escape political correctness, and that we should always insert the proper official emotions whenever key words are expressed, but in this case you may completely missed the point Pettis was making. ”

        Given that I personally LOATHE political correctness and DETEST people who resort to it, I see great irony of being accused of introducing it into this discussion myself.

        I do not believe that I have missed any point that Michael was trying to make. I understood him very, very clearly. I think you may well have missed the point I was trying to make. If you read my comment again, you will see that I ended it with a QUESTION. Do you have the answer to that question?

        • To answer your question, Vinezi, the Spanish claim was, as CharlieTuna noted (“took silver by right of arms from the Incas”), the claim of conquest. I think most empires are built that way and destroyed that way too, but I am not sure that this makes the trade balance any different.

          Some of the silver that came to China was mined in the great silver mines of central Europe, most famously at the Bohemian town of Joachimsthal, from which we get the word “dollar” (the silver coins minted there were called “Joachimsthalers”). These various states, principalities,kingdoms, etc. were also conquered by the Hapsburgs, in the same way that the Aztec and Incan empires were conquered, but I am not sure that this changes in any way the exchange of Chinese wares for Hapsburg silver.

        • ^^Michael Pettis WROTE: “To answer your question, Vinezi, the Spanish claim was ….x… the claim of conquest.”

          This seems to be the answer I was looking for. I don’t mean to try your patience, Michael, but I would like to digress slightly more with a few additional points if I may…..

          My question was not really about trade balances (hence the ‘digression’), but about the prevalent differential-usage of words as a result of perspectives. Compare the following:

          A) The Europeans DISCOVERED America and EXTRACTED wealth from the COLONIES.
          B) The Nazis INVADED Europe and STOLE wealth from the OCCUPIED countries.

          Most Europeans would agree with both (A) & (B). But if someone just switched Europeans for Nazis and Europe for America in (B), they would immediately be attacked for trying to “impose political correctness”. For some reason, most Europeans do not seem to be able to use words like ‘invade’ and ‘steal’ when it comes to their behavior in the Americas. They prefer to use words like ‘discover’ and ‘extract’ instead. Look at the following:

          A) The expansion of the European Empires to the Americas was NO DIFFERENT from their previous expansion within Europe.
          B) The expansion of the Nazi Empire in Europe was NO DIFFERENT from the previous expansion of the European Empires to the Americas in (A).

          Most Europeans would agree with (A), but not with (B). Why? I mean lebensraum, genocide, resource-scrambles are all in common, so why is there so much resistance to (B)? Why do the Europeans demonize Hitler so much and yet glorify Churchill, when there are many startling similarities in their world-views:

          A) HERO of FREEDOM Winston Churchill on Lebensraum: “I do not agree that the dog in a manger has the final right to the manger even though he may have lain there for a very long time. I do not admit that right. I do not admit for instance, that a great wrong has been done to the Red Indians of America or the black people of Australia. I do not admit that a wrong has been done to these people by the fact that a stronger race, a higher-grade race, a more worldly wise race to put it that way, has come in and taken their place.”

          B) ENEMY OF FREEDOM Adolf Hitler on Lebensraum: “At long last, we break off the colonial and commercial policy of the pre-War period and shift to the soil policy of the future. If we speak of soil in Europe today, we can primarily have in mind only Russia and her vassal border states. Here Fate itself seems desirous of giving us a sign. By handing Russia to Bolshevism, it robbed the Russian nation of that intelligentsia which previously brought about and guaranteed its existence as a state. For the organization of a Russian state formation was not the result of the political abilities of the Slavs in Russia, but only a wonderful example of the state-forming efficacy of the German element in an inferior race.”

          Something for us all– and especially the Europeans amongst us– to think about.

          • Actually while Europeans behaved in horrible ways during their adventures abroad as they conquered, pillaged, and looted their weaker neighbors and colonies, so has every other empire strong enough to do so, Vinezi, including the US of course, but to say that “most Europeans do not seem to be able to use words like ‘invade’ and ‘steal’ when it comes to their behavior in the Americas” is a little unfair. As late as the 1960s European historians still seriously downplayed the worst aspects of their country’s histories, but I think beginning in the 19th Century we began to see a major change in the way Europeans wrote about their own histories that was unparalleled in history (although as soon as I wrote that I remembered Tacitus’ withering description of the Roman conquest of England: “To ravage, to slaughter, to usurp under false titles, they call empire; and where they make a desert, they call it peace.”) and by now no group of people in the world is more politically correct that western academics, although sometimes I find that they take it so far that it becomes patronizing, as if no one is capable of evil except Europeans (which is itself a kind of unconscious self-aggrandizement, isn’t it, and turns the rest of the world into sweet children).

            In fact it was Europeans and Americans who invented the concept of political correctness (even more specifically I think in its most virulent form it was born in Berkeley in the 1970s). At some point in a few hundred years we will probably be able to discuss these things more dispassionately.

            But now I am really digressing.

      • ^Charlie Tuna wrote: “…and that those Native Americans who actually mined the silver and those Native Americans who were the beneficiaries of silver mining would probably not have appreciated the cavalier way in which you toss them all together”

        COMPARE: “… and that those Africans who actually picked cotton and those Africans who were the beneficiaries of the cotton-plantations would probably not have appreciated the cavalier way in which you toss them all together”.

        Think about the BIG picture: The silver left the Americas and went into China. The silk left China and went into Europe. EXACTLY WHAT is it that left Europe and went into the Americas to complete this trade? Was it the blessings of Christianity? I am seeking an answer to this question. Anyone?


        ^Charlie Tuna wrote: “The Spaniards were brutal and efficient, and took silver by right of arms from the Incas… x …or the Aztecs…. x ….in the same way that the Inca and Aztecs took them. ”
        ^Charlie Tuna also wrote: “….no really, I understand how all you little brown people must have suffered!”

        COMPARE: The Nazis were brutal and efficient, and took wealth by right of arms from the Jews, in the same way as the Jews took it from others.
        COMPARE: “….no really, I understand how all you little Jews must have suffered”



        ^Charlie Tune wrote: “And if you want to remind us of how generous you can be, spare a thought for the children who worked the British textile mills, the British coal miners…”

        I am sorry to say that I have personally not given much thought to the issue of the children who worked the British textile mills, the British coal miners. However, you will be very happy to hear that this little brown fellow has:

        Here is the same fellow in video:


        ^Charlie Tune wrote: “But the big point I propose is that none of this has to do with bilateral China Europe trade …”

        Yes, it does; for the simple reason that there was no “bilateral trade” between China & Europe. For that to have happened, the Europeans would have had to mine their own silver, from their own silver mines and with their own labor, and then exchanged that “European silver” for the Chinese silk they wanted. The arrangement that Michael is describing, in which the Europeans were exchanging American silver for Chinese Silk, is intrinsically multilateral, even though it might not be “trade” in our modern, legal understanding of the word. Therefore, it cannot be analyzed on a solely bilateral Europe-China basis.


        ^Charlie Tune wrote: “It is just the kind if moralizing that makes us feel good which, Pettis claims, and I believe, simply confuses the obvious.”

        I not a very moral person. I can’t remember when, if ever, I last moralized. However, I do think that you may be rationalizing.

        Indulging in feel-good rationalizations like “we only did to them what they did to others”, “if we hadn’t done it to them, someone else would have”, “if they could have, they would have done the same thing to us”, ALSO confuses the obvious, although of another kind.

    • Let us not forget that after the Native Americans had been crushed under the boot of European Colonialism and could no longer work in the mines the Europeans then arranged to bring in African slaves to work the mines.

      • I think we are all getting a little off the track here and while we all love to feel indignant I am not very convinced that it really adds much to the analysis of global trade patterns. What did the Native Americans get from the Spaniards for the silver? Probably the same as they got from the Inca for the same silver before Pizarro’s conquest, and probably not much less than what Bohemian miners got from the managers and owners of the central European mines — just enough food to stay alive, is my guess. What is more, before Chinese silver mines largely stopped producing and China had to turn first to Japan, then central Europe, and finally the Americas for its silver, I doubt that most of the silver produced in Chinese mines was mined by anyone other than prisoners, slaves, and the desperately poor who received almost none of the value they produced. If you are seriously trying to qualify the analysis of global trade links by making a distinction between metals that were mined by willing miners who received the full monetary value of the metals they mined, and metals that were mined by slaves or the desperately poor, who received almost nothing, I suspect you are going to come up with a distinction that has little practical use until the last century, and even then it doesn’t qualify the extent of global trade links.

        • ^^Michael wrote: “What did the Native Americans get from the Spaniards for the silver? Probably the same as they got from the Inca for the same silver before Pizarro’s conquest..”

          If you are referring to the “wages” that the Native Americans silver-miners received from the Spaniards, then YES, you are 100% correct that it would have been the same as they received from the Inca, and would have been just enough for them to eat and stay alive (subsistence). To those miners directly, it may have made little difference. However, was there no difference for Native American society as a WHOLE? I’m not so sure.

          For example, if the silver stayed in the Americas (i.e. the ‘seigniorage’ or ‘profit’ from mining went to the Inca), the increased effective money-supply could have been used by the Inca to increase production, reduce under-employment and allow further population growth (e.g. buy more public-pots, buy more stone-bricks, finance expansion of the cities, pay to build more roads, order the leveling more terraces for agriculure, build more aquaducts and so on). If the silver supply rose too quickly, it could alternatively have been stock-piled to pay for future contingency food-imports from neighboring civilizations during unexpected famines or other disasters. It could even have been stockpiled in anticipation of future exhaustion of easy-access mines and have provided re-assurance (market confidence) to the local population.

          But since the silver LEFT the Americas and nothing came back in its place, this was not possible and so economic stagnation (decrease or slower increase in money supply) and uncertaintly (loss or slower increase of stockpile) may have followed.

          In short, what I am saying is that there may have been a material difference to American society as a WHOLE between the oppressions of the local Inca and the oppressions of foreign Spaniards. For example:
          Sumner Welles: “Somoza’s a bastard!”
          Roosevelt: “Yes, but he’s OUR bastard.”

          • I don’t think “monetary policy” matters in a subsistence economy, and it is not as if the Inca was using gold and silver to create coins. Had the gold and silver stayed in America we would probably have even more spectacular museum displays, but it would not have had much of an economic impact.

          • @Prof: I think you and didn’t understand what Venizi wanted to say. To me he ask a very good question about ‘your’ method using accounting identities. Because if you assume some part of a world is stolen by an other identities lose their meanings.

            My answer to his question, would be this. if you think as a whole Inca was underpay, so you have kind of wage repression. But more if you think they were stolen you have to had some kind capital of flight. Capital flight look like abroad investement, but the wealth never come back to the country it came from.
            It’s very important to us because there is a massive capital flight from China. And on wht prof said about social capital, capital flight as a massive impact? Because when the money came back it should be back with a bit of social capital from abroad. You can take Toyoata investement in the US as an exemple.
            But capital never come back and modernisation also. So i would say that the fact that the money creat abroad stay abroad prevent country like China to modernise its supply.

  4. Hi Michael, another source of multinational economic history is Scott Reynolds Nelson’s book A Nation of Deadbeats, which is a global view of US economic history, have you read it? You might enjoy some of his internationally-based root cause analysis of some of the big US financial panics.

  5. There is a misconception that the existence of euro depends on the existence of EU, this is false. Even if EU breaks up and all European countries revert to using their own national currency, the euro can still function as a settlement and reserve currency for all European countries. Even if one country exits from EU, unless it stops trading with the rest of EU, it will need to hold euro reserve and use euro to trade with the rest of EU.

    • I agree. In fact I think those most likely to kill the euro are its staunchest defenders who insist, against all history, that even though Europe clearly has not yet developed the institutions that make a common currency manageable, there can be absolutely no flexibility in reforming the structure and use of the euro. Every successful currency, at least for a large, diverse economy, evolved gradually with many mis-steps and back-tracking. The history of the US dollar, for example, rolls, shudders, rises and falls like a roller coaster. If we are ever to have a unified Europe with a unified currency, I don’t see why inflexibility should be its key characteristic.

      • Even in the case of the US, the fiscal unification came well before the monetary unification. In fact, the topic of whether or not the US should even have a central bank was (and is becoming now) a major issue. One of the major historical points that changed the US decision for a central bank was actually the War of 1812, which the federal government had problem coming up with funds for. That’s one of the reasons why the Second Bank of the United States was chartered.

        Personally, I don’t see why we shouldn’t eliminate the Federal Reserve and the national debt this time around too. We’re having bureaucrats with no skin in the game running things (monetary policy) they don’t understand. Earlier in US history, a central bank was needed for purposes of war. Now, I don’t think any country can touch the US militarily, but we still have a central bank? I don’t see why it’s necessary right now.

        • There is no serious contention that the FED should go, by any serious contender, able to make that happen, there is only, fringe, paranoid, delusional groups, in extreme positions, that will never gain enough prominence to see this happen. Only the many fringe, groupings of people, often at odds with each other, more than mainstream America (how that must drive some of the PC group bonkers), such is sheer lunacy, of lunatic delusionals.

          Funny many of these same are the people discussed earlier, who heighten the importance of words over reality, as if the external other has more import over how another feels, then you yourself. As Michael said, those sweet little children.

          Had an African American history course some decades ago, where the professor implored the students, “don’t let them take the power away from you”; in other words, sorry Hollywood-minded people, there weren’t Europeans running around Africa with nets, there were Africans, long involved in the slave trade, for neaerly a thousand years before with Islamic traders, managing a North South slave trade route, altered to East to West by the introduction of European traded goods and guns, even though mythology has the Europeans producing nothing anyone else wanted. Ridiculous, and insulting, to the very people the PC’ers think they might be protecting (at least their feelings, as if the external other, controls how you feel, again, how ridiculous< why allow yourself to be the weak, and powerless, as the good professor was imploring the students)..

          • Just because getting rid of the Fed isn’t in the mainstream doesn’t mean it’s a bad idea. We (the American people) are losing our wealth so we can benefit countries like China, who have oppressive regimes led by authoritarian guys while the ideas they have run the exact opposite of ours.

            I don’t see why only lunatics would believe that it’s morally wrong to have people with no skin in the game make decisions about things they don’t understand while working under the delusion of having an understanding about these topics. On top of this, the public at large suffers the consequences while these guys walk out with millions in the bank. The classic example of this was Alan Greenspan, who wasn’t really skilled at anything. It really doesn’t take a rocket scientist to put 2 and 2 together to realize something ain’t right.

            If you eliminated the Fed, the dollar would fall in the FX market which would lead to US producers getting a massive boost. The only people who’d get screwed are places like Europe and China. Europe is led by ideas where the guys in charge (and the populace) think that fascism and socialism are opposites while China is led by authoritarian guys who’ll do whatever’s necessary to keep power while ravaging other people’s lands and oppressively ruling other groups. Why should we take a loss for others? It makes no sense.

          • Morally Wrong: Who said our decisions on matters more relative to the operations, the operating of a, complex adaptive system(s), should be founded upon notions bound up within morals; which are inevitably subsumed to the perspectives and foundations (even experiential, nature versus nurture) of the individual, insofar as individuals, even when in a group of like-minded individuals, make a personal choice of what is moral. The father, a father, of modern rationality, upon which most of our “facts” stem, solved this nearly 4 centuries ago (Benedicto de Espinosa, Ethica). You would have me base, or rather the people base their decision, upon the foundations of those in post-modernity, on their predilection to impose subjective values into all matters. They do this, of course, because inevitably , even the hard sciences are subjective (so their mantra goes). Ironically, it was those within the hard sciences who notified us of this, in an attempt to push greater objectivity, while malcontents, as post-modernist critical artists, of one post Kantian, post romantic, post 18th century revolutionary age of idealism or another, would like to argue upon moral groundings, as if to confound everything for their mere feelings (early 19th century Romanticism, coupled to post-Modern pseudo spiritual, post-Modernist art cum critic). Of course the would have us believe, and encourage many others to follow, their heart felt beliefs, as if in our hearts we are all the same; it was morally correct for the followers of Jim Jones to drink the Koolaid in Guyana, by the group accepted morals, and for followers of Manson to stab pregnant women, no less for one Bosnian group to put the other in camps, Amin to eat testicles, and I assume, even ISIS, to cut of the head of Journalists.

            Oh dear, oh dear, no my friend, the issue is not merely morally wrong, despite the lamentations of Marxists, Libertarians, Anti-imperialist’s and other Fundamentalists cum modern Theologian across the global socio-politico philosophical spectrum.

            Anyway, then, there is the unfounded assumption of this moral statement, of a link between the FED and the enriching of Authoritarians, when the FED has just sidelined all large capital, as the US itself, the government, and the FED are the largest holders of their debt, able to use interest, to buy new debt, pay down debt, or as another tool in its arsenal for growth and toward stability. Despite great growth of assets held abroad, US holdings itself have grown even quicker. Not sure how that benefits the Authoritarians, actually just negated any relevance of the holdings on the US, but for the engineering of growth, printing of money and asset bloat in their own economies. Further, the FED would be able to do it again, were it necessary. And that supports all other structural relations which obtain in the economy, from the top 1%’s asset valuations to the very same classes held by normal peoples pensions, in their 401K’s, and in their mutual funds.

            If you eliminated the dollar would fall, we could make it fall as and when we want with the FED still in place. It is a political policy goal, of a “relatively” strong dollar” for as long as it is in the US’s interest, the FED holds no such operant mandate, if the seek stability in valuations. What Brazil has done can be done, Tobin taxes and similar, or closed markets with restrictions, if ever such an unimaginable goal is necessary. I see this only as necessary if more countries continue to fail to realize that as they grow as a proportion of global GDP, more countries have to move into a global systemic position as the US, or inevitably, even the US will withdraw, because Eichengreen is wrong, and we understand why for all of the systemic reasons, Michael describes.

            I have always thought, that the US, insofar as it benefits now, in the ways it would inevitably, of some measure or another, will inevitably benefit as it switches out of the primary role it has played, as I suspect you do. Further, that China, as comprised is a break on the development of other countries, more than a threat to other countries. Especially if their leadership believes it can practice a Flying Geese model of development from the coast to the interior, as a growing, and often poor, emerging world desperately seeks development.

          • Why are you trying to define everything in a literal sense (ex. morality)? Our ability to even conceptualize ideas is extremely limited. There are things we know without know how or why we know. There are forms of information that can’t be written and expressed in words. Human rationality is extremely limited and we need to understand those limits before we make decisions. One of the most dangerous things, IMO, is a society run by “rationalists” (for lack of a better word). You can cite all the artists and the literature that you want, but it doesn’t mean anything and it doesn’t make us more robust.

            I don’t think you understand what I’m saying. You can reference all the art and literature you want (I certainly can’t do that), but that doesn’t mean we should work with this top-down vision of the world and that we can boundlessly do whatever we want.

            The reason I want to get rid of the Fed is simple: it’s the agency problem. Just because the Fed could do everything again doesn’t mean they should. I find what you’re saying extremely dangerous because it leads us to naive interventionism. Basically, I know it’ll cause us to blow up. This is, IMO, one of the reasons why religions evolved.

          • Or Suvy

            It could do X or Y or any other value (by your very own admission, or discomfort), but because it could do the one you assume to be the worst, potentially, of your admissions, of many potentialities, we should do away with it, because that is possible, where a world of other possible benefit could be deprived, upon that logic we might refrain from doing anything; walking down the street for fear of bus jumping a curb and flattening us, eating for choking, typing on computer for fear of electric shock, etc, and so on.

            I would not, in the complex adaptive system world , with emergent properties leading to ever-new moving positions, with new and receding forces, some increasing and decreasing in strength, tie or hands, at the alter of some mere philosophy for the satiation of a potential negative outcome, in a world of many positive and negative outcomes, for evermore, regardless. Least of all for Austrians.

          • If you want a robust system, it’s one that needs to be prepared for the worst case scenario. I’m not saying that we should take no risks, but you shouldn’t blindly take risks and set up scenarios where you’re having someone fly a plane who doesn’t know how to fly one. That’s what we have at the Fed.

            You need to take calculated risks. Having people who have no clue what they’re doing while being given some of the most powerful positions in the world is a recipe for disaster. You’re giving someone a plane to fly who doesn’t know how to fly it while they get away completely off the hook if they run it into the ground and you’re telling me the sensible thing to do is to keep being in that situation?! That’s a sucker’s bet and something designed to blow up.

            It’s basic economics: incentives matter! If you light a fire under a rat’s ass, don’t be surprised when it runs. It’s really that simple.

          • Suvy

            currently reading Taleb nassim (Black Swans) book called “Fooled by Randomness”.

            Have you read it, might add to our discussion, perspectives, understanding, and moderation of needs to react to possibilities.

          • I’ve read every single one of Taleb’s books (several times actually). I read his papers too. His papers are actually very rigorous and a very fun read. He’s one of my favorite thinkers and one of the best we’ve got IMO.

  6. Hello Professor Pettis,

    Thank you for the enlightening interview. I do not intend to misrepresent your thoughts, but it seems that you often indicate that the actions of one country (ex: Germany / China) have mandatory results within other countries (ex: Spain / US) and that those latter countries are passive actors in the resultant outcome – that one action causes the other due to the mandatory balance of payments.

    I’ve followed your writings for several years and come back to the same question: is it not that both actors must actively participate in order to produce said outcome? The following Robinson Crusoe example might help illustrate my point:

    Two desert islands, Germany & Spain, share the same currency. Germans decide to produce more than they consume, export the surplus to Spain and simultaneously increase their savings (i.e. not proportionally increase their imports). If this were the case, I assume you would state that Spain is now forced to run a trade deficit and increase its total debt load (though maybe my assumption is incorrect).

    However, is it not at least theoretically possible that the Spanish islanders could:

    1) refuse to import more in nominal value than they export
    2) refuse to borrow or allow German investment

    If the Spanish import more than they export then they will eventually run out of money, thus requiring borrowings in order to perpetuate the consumption imbalance. But if the Spanish proactively refuse to allow this imbalance to occur, does that not then place the “problem” back to the German islanders? If Spaniards refused to import more in nominal value than they export, does that not require the Germans to either consume their own surplus and / or export at firesale prices thus forcing a loss on their own factories?

    And if the Spaniards did allow a trade deficit to occur, is it not possible that they could balance this out by refusing to allow German lending or capital investment, thus forcing the balance to rectify itself by eventual German net importation of Spanish goods? If the Germans refused to decrease their savings and run a trade deficit while being banned from lending or investing in Spain, then effectively all they have done is passed along goods of real value in order to accumulate pieces of paper – who has won and who has lost then? Surely the Spaniards are better off. The problem that exists is that we know eventually the Germans will cease to participate in such a foolish endeavor but by then the Spanish might have already grown accustomed to the arrangement, thus the rebalancing could be very jarring (but that pain is simply the cost of previous years of leisure).

    The actions of Germany will indeed have actions on Spain, but it seems far from clear to me that an increase of German savings and intended trade surplus must result in Spanish trade deficits and borrowing. Running a trade deficit & increasing debt is one option when presented with this new supply of foreign imports, but it does not seem to be the only option. I would suggest that it is the option most likely taken because the receiving country is happy to obtain goods now in return for some nebulous promise to pay things in the future (especially when it’s 30 year debt and it’ll be a different generation who must pay it back). As I see it both actors actively agree to participate in this arrangement.

    I am not looking to place “blame” anywhere here – I am simply trying to think through the mechanics and optionality.

    Thank you again for all of your excellent writing.

    • Quite an excellent point, if I may, Davis. Often the simplest analysis of “economic” problems is also the most revealing. Could I just suggest that your way of approaching these matters leads us back to the reality that “economics is a concentrate of politics”. Let me explain: whether or not a nation-State decides to stick to a currency union or to a fixed or to a floating exchange rate depends really on the ability or less of that nation-State to control its workers (Pettis calls them, politely, “households), that is to say both the wage level and the level of inflation. Tying one’s currency to that of another country – say, Spain joining the euro and letting the Bundesbank determine monetary policy – allows the Spanish bourgeoisie (“firms and governments”) to discipline both themselves and their own workers.
      So how can Germany be better able to determine a stricter monetary policy than, say, Spain or Italy or Greece or even France? One possible answer lies in the fact that Germany (but also Japan and Korea and other “mercantilist” countries) emerged from World War Two with a working class that was politically annihilated and whose leadership could be persuaded to accept a level of “Mitbestimmung” – an agreement to keep wages low and gain “competitivity” at the expense of other European countries whose working classes had emerged in much stronger shape out of the War.
      Look, it’s just a suggestion – but you may find it useful to pursue this more “historical” approach to economics than that of the more “scientific” presentations that thus far are leading us straight to the precipice! Regards.

    • That was what Spain would have done before they joined Europe, but under the rules of the euro Spain could no longer raise interest rates, devalue its currency, or impose tariffs, so it had no choice but to allow German capital into the country. Of course it had “choice” in what it would do with the capital, but those choices were limited. It could have run a fiscal surplus, which it did, even though Germany did not. It could have imposed tougher capital rules on its banks than the rest of Europe, which it also did.

      But these were not enough. Spanish manufacturers could have increased investment in capacity, but why would they if the German tradable goods sector was expanding at their expense, and even the Germans were unable to find productive uses for the money? In the end, Germany was unable to invest productively the excess savings it had accumulated by squeezing workers, so it forced those excess savings onto Spain and left Spain to deal with it.

      How did Spain deal with it? Badly, of course, but badly in exactly the same way every country under similar circumstances has always dealt with it. As long as there is a diverse group of potential borrowers with different projections for the future and different risk perceptions, the availability of cheap capital inevitably finds a home. With so much cheap capital flooding into Spain (and into other countries that entered the euro with higher inflation and higher interest rates), it was inevitable that it would flood into speculative projects that would at first seem justified by the ensuing growth, but that would ultimately prove excessive.

      By the way, I am not “blaming” Germany. I think the “mistakes” Germany made were made by bankers and policymakers at the expense of German workers, and it is not a surprise that European bankers generally did well out of this while European workers either saw wage growth squeezed, like the Germans, or saw jobs disappear, like the Spaniards. Several months ago I met a number of very senior members of a major German party of the left, and far from resenting my explanation they agreed with it completely and insisted that I spread the message as loudly as I could.

      • MP wrote:
        “Several months ago I met a number of very senior members of a major German party of the left, and far from the resenting my explanation they agreed with it completely and insisted that I spread the message as loudly as I could.”

        My comment:
        If there is yet any hope to save the euro, or even the EU, is precisely this attitude. There is a problem with language when we continuously use as a subject something as complex as “Germany” as intentionally taking particular actions that have whatever consequences. This is specially true in the case of a decentralized country like Germany. Isn’t this idiomatic use what makes us so prone to misunderstanding?

        • I fully agree, Ignacio. In the past year in most of my writing on Europe I have tried to distinguished less among Germans and Spaniards and more among workers and bankers, although this too is a simplification that can be misused. A global economic crisis is a political-economic event, and not a national event, because inevitably it means wealth transfers among different social groups each of which crosses national lines. Of course a lot of otherwise-nice people in the US are going to criticize me for “fostering” class warfare, but it is silly to pretend that financial crises affect everyone equally, and the longer we pretend, the more we must be loved by right wing extremists.

      • First of all, I have learned so much from reading your blog. Really great insights and a way of understanding things that have changed and expanded my views on a number of things.

        And I would just note about Spain and Germany:
        “China’s extraordinarily high savings rate is almost wholly explained by the transfer mechanisms that subsidized rapid growth over the past two decades, leaving Chinese households with the lowest share of GDP in the world, and perhaps the lowest ever recorded for a large economy.”

        Funny, but one of the main things I have learned from reading you is about balance sheet ….uh, balance. You pay the price sooner or later.

        • Thanks, Fresno. The reason Hyman Minsky is one of the greatest economists of the last 100 years, and also the reason he is largely ignored by academic economists, is because he understood that in capitalist economies every economic entity is effectively a kind of “bank”, and its behavior is linked up with every other economic entity via its balance sheet. This is why once you introduce debt into an economy, or at least enough debt to “matter”, understanding the structure of balance sheets — and this includes understanding the process of financial distress and the ways balance sheets systematically enhance or dissipate volatility — is one of the fundamental ways in which to understand the economy.

          But for some reason although all these things are well understood by academic finance specialists, and most economic historians, most “pure” economists think of the factors that determine growth as if we lived in a world of no debt. This world, like Newton’s universe, is only a special case of the real world, but unlike Newton’s universe, it is a very poor approximation of the world we live in.

          By the way there are of course many important economists who know this, either explicitly or intuitively, and I don’t just mean iconoclasts like Steve Keen. What is most interesting, at least to me, about guys like Krugman, Stiglitz, much of Keynes and of course Irving Fischer is that in their worlds balance sheets matter crucially. It is also impossible to think of work by the likes of Merton, Modigliani an all the other options guys except as expressions of balance-sheet impacts. It is just the mainstream academics who fail to see that once you introduce debt you cannot explain or make predictions without understanding the ways in which balance sheets change behavior and outcomes. Because we seem to be living in a world of inexorably rising debt, I think academic economics must become increasingly irrelevant if it continue to treat guys like Minsky, Merton, and Fischer as nothing more that interesting side roads in the main artery of economic thinking.

          By the way most of the smartest investors I know have no doubt at all that balance sheets are crucial to their understanding of how the economy works. Soros’s theory of “reflexivity” is nothing but a balance sheet phenomena, as he tries to explain many times. And any trader who think in terms of convexity, or of the impact of changes in liquidity on asset prices, or who worries about how leverage affects market mechanics, or who tries to pull a sort squeeze is, knowingly or not, a balance sheet guy.

          • “Soros’s theory of “reflexivity” is nothing but a balance sheet phenomena, as he tries to explain many times. ”

            Could someone explain this? I’ve read his books and lectures but never made the connection.

          • How do balance sheets matter in Krugman’s (or even Stiglitz’s) examples? Krugman almost always shies away from balance sheets and still thinks in terms of IS/LM. On top of this, he had an article claiming the virtues of Keynes’s work in IS/LM when Keynes explicitly rejects IS/LM in one of his papers: Alternative Theories of the Rate of Interest. I actually even reference the paper and cite it in my attack against IS/LM (that I attach below).

            Steve Keen even had an exchange with Krugman Keen actually points out the flaws in Krugman’s work and it ends up with both of them trading insults.

          • John and Suvy, Krugman got his Nobel Prize mainly for his work on multiple equilibria in the FX markets, if I remember correctly. Mexico in 1994 is a great example of how this works. Before the Mexican peso broke, most people assumed that it was overvalued by 15-25%, and yet it broke by more than 50%.
            Why did it drop to a level that probably not a single market player thought was fair value, let alone the market as a whole? Because of the famous “Tesobonos” (dollar-indexed government bills). When low credibility (caused by overvaluation plus low reserves relative to dollar-indexed debt) caused the peso to break, it led automatically to dollar outflows, which led automatically to more currency weakness, which led automatically (because the cost of Tesobonos rose when the currency declined) to even lower credibility, and so on in a self-reinforcing loop until the value of the peso had dropped far below even the lowest estimates of its “equilibrium” value.
            The same happened in Korea in 1997.
            Currencies do not adjust to their correct levels if debt structures force agents into self-reinforcing behavior. Soros’s “reflexivity” is for me just a more general statement of this kind of “irrational” adjustment in prices.
            As for Stiglitz, I know him best for “informational asymmetry” and for his “backward bending yield curve”. I think of the former as clearly a kind of financial distress mechanism, and the latter as an extreme version of the same.
            Sorry for the brevity of my answer and for sounding like I am peddling my book, but it is very late and I discuss this in much greater detail in The Volatility Machine.

          • In mathematics/chaos theory/complexity theory, what you’re describing is called a positive feedback loop. I remember you talking about such phenomena in The Volatility Machine.

            My primary attack on Krugman is really based on IS/LM, which I find to be a poor model. For the record, I was taught IS/LM when I took intermediate macro. Our entire class was effectively taught Krugman’s blog. At the time, I had a relatively high opinion of Krugman and would literally study for the class by reading his blog posts (I’m not exaggerating!). Here’s Krugman criticizing Minsky in one of his more recent posts and others for saying that IS/LM isn’t what Keynes said. Little is Krugman aware that Keynes explicitly rejects IS/LM in one of his papers written in 1937 after the publishing of The General Theory (the paper is called Alternative Theories of the Rate of Interest).

            I’m starting to think that Krugman never actually read most of Keynes’ work and is masquerading as he did. I’m starting to think Krugman just claims that Keynes said something to support his arguments, but what Keynes actually said and wrote don’t really seem to matter to Krugman.

            With all that being said, I can’t even remember the last time Krugman drew a balance sheet. In Krugman’s back and forth with Keen, there’s one time Krugman actually says that when the Fed creates $1 in reserves, $10 get created in assets. Krugman doesn’t even seem to understand that QE is simply an asset swap where the Fed buys an MBS or TSY by creating new liabilities. To be honest, I don’t think Krugman knows very much about money and banking.

            For example, Krugman (along with Stiglitz and Keen) then go on to claim that it was “deregulation” that caused the financial crisis without ever pointing out the massive liquidity expansions created by the Fed to offset the loss in foreign demand. I can never think of one time where Krugman says the problem is the USD being the reserve currency, which causes the world’s most capital-rich country to import capital. If the world’s most capital-rich country is importing capital, you will have asset bubbles. On top of this, Krugman actually supported what the Fed did in the early 2000’s as good economic policy even though he knew it was creating an asset bubble.

            Instead, Krugman’s solution involves creating more agencies, more rules, and more bureaucrats making decisions (proof is here: http://www.nytimes.com/2014/08/04/opinion/paul-krugman-dodd-frank-financial-reform-is-working.html). Keep in mind that most of these bureaucrats already have no skin in the game and there’s a massive revolving door within our regulatory agencies and even our politicians (like Eric Cantor who got kicked out of Congress and is now working for Goldman Sachs). It doesn’t take a rocket scientist to figure out something’s horribly wrong here.

            Basic economics tells us that the incentives are lined up incorrectly and the rules are too complex, which allows a few people to game the system. You’ve got the big banks (along with other big corporations and the military industrial complex) in the pockets of what amounts to all of the mainline guys in Washington and this guy is arguing for more bureaucrats appointed by these cronies in Washington to make decisions about things that no one understands. On top of this, the people making these decisions don’t even suffer the consequences of their actions. Basic economics tells us incentives matter and the incentives aren’t lined up properly, but Krugman refuses to address these points because it doesn’t fit his political rhetoric. Krugman even goes on to say that Dodd-Frank is working and that we need more regulation here (http://www.nytimes.com/2014/08/04/opinion/paul-krugman-dodd-frank-financial-reform-is-working.html).

            Then, Krugman resorts to personal attacks against anyone on the other side of the political spectrum for pointing out the obvious flaws in our system and in his logic. I’m sorry, but Krugman doesn’t understand very much about the real risks. Absolutely nothing has been fixed. We’ve went from too big to fail to even bigger to fail. We’ve got a situation where all of the gains are being privatized and all of the losses are being socialized. We’ve got corporate executives in these large corporations who get a bonus and a salary if they’re right and a salary if they’re wrong. These have been the guys running our economic/finance policy and our foreign policy as well. This is a complete joke.

            These were the same guys that’ve been funding groups like ISIS to overthrow Assad in order to control supply lines so that we can help the Europeans get cheaper gas. In this process, we’ve created the worst, most radical, fundamentalist group that effectively runs on extracting natural resources and selling it for cheap on the black market while ruthlessly wiping out anyone who doesn’t agree with their world view. We’re allied with fundamentalist regimes like Qatar and Saudi Arabia over the past few decades and the guys running these countries are some of the most oppressive regimes in the world. The current government in Ukraine is just a puppet regime of the US and the only reason we’re involved over there is to undermine Putin and the Russian government. Yet Krugman holds up our actions in Ukraine as good (he does so here: http://krugman.blogs.nytimes.com/2014/09/11/their-own-imaginary-keynes-wonkish/?module=BlogPost-Title&version=Blog%20Main&contentCollection=Opinion&action=Click&pgtype=Blogs&region=Body)

            Sorry for the attacks on Krugman, but none of my attacks are personal. All of them are backed by the facts and involve the things he actually said. Krugman berates Minsky for saying the truth and in the very beginning of Minsky’s first book, John Maynard Keynes, Minsky destroys the basic foundation for much of Krugman’s work in about 50-60 pages.

          • My understanding is that Soros’ investment framework of self-reinforcing boom – bust patterns is the exact translation in the financial sphere (equities, bonds, credit, FX markets) of the imbalances arising out of cross-border trade, payment, investment and financing flows taking place in the real economy, which is the framework that Michael Pettis uses in the economic sphere if my understanding is correct. The amplifying factor behind the boom – bust asset markets cycle which makes them self-reinforcing is obviously credit. Most of the balance sheet of funds like Soros’ is a portfolio of carry trades, meaning the long positions are funded by borrowings in one form or the other with only a small amount of equity capital backing the total portfolio. It is this excessive creation of new means of payment through the credit system that enables the purchase of an increasing volume of assets (whatever they may be: Manhattan apartments, Dutch tulips or Alibaba shares) at rising prices on the way up. Investors can effectively buy without paying. And it is the destruction of these same means of payment as speculators scramble to deleverage that trigger the crash and the forced liquidation on the way down. Investors can effectively sell without first owning.

            One only needs to look at Soros investment record over the last 40 years to appreciate that this is the correct framework for understanding the financial world. His investment genius is to have understood how the system works long before (since the beginning in the early 1970’s really) and far better than 99.9% of market participants who are confusingly chasing these trends without understanding the forces behind and their interactions, thus always missing the critical turning points (same comment apply to central banks, Greenspan “conundrum” being the most famous expression of their total confusion). In that sense, Soros investment track record reinforces the conviction that the framework Michael Pettis is using for economic analysis is the correct one under the current system.

            I don’t recall now whether Soros admits that such a speculative system (leverage, currency mismatch, duration mismatch, herd behavior, etc) is inherently destabilising for the economies affected or whether he claims that it has its usefulness in enforcing the adjustments that politicians might otherwise be reluctant to undertake.

            For what it’s worth, my view is that these arbitrage-chasing financial flows could indeed be useful to enforce the economic adjustments if and only if they were not leveraged. But, the fact that they are leveraged (often very leveraged) means that the movements go way too far way too quickly on both sides as these financial flows represent up to 35x the size of real underlying economic flows on a daily basis. That’s where their net effect becomes in fact very destabilising for the economies concerned and the people and families making a living out of these economic activities.

            At the end of the day, however, i find it futile to blame investors for pursuing arbitrage opportunities in global financial markets or multinational companies for pursuing labor arbitrage opportunities in global labor markets, when such arbitrage opportunities are offered on a plate by the international trade and monetary system in its current set up since the end of the Bretton Woods regime in the early 1970’s and the rise of trade globalization since the late 1970’s. Investors and corporate managers are only acting according to their fiduciary duties within the institutional framework decided and implemented by policymakers. After all, if Soros spotted a weakness in the balance sheet structure of Mexico in 1994 and was allowed to short the Peso / Dollar or if Steve Jobs saw an opportunity to have the Iphones manufactured by Chinese workers paid $5k annually rather than by American workers paid $35k and was allowed to go for it, they would have failed to defend the best interests of their co-investors if they had not taken them. It would be futile to tell them – and their peers and successors – to be kind enough not to do it, or at least not too much.

            It is this institutional set-up of the global trade and monetary system that needs to be thoroughly amended so as to close the imbalances and related arbitrage opportunities. As long as this is not done we will continue to see the same economic imbalances develop in various parts of the global system and the same repetition of related financial boom – bust cycles witnessed in the 1920’s and again continuously since the 1970’s (Latin America, Japan, Asian Tigers, US TMT, US real estate, Chinese real estate, etc) that are drowning the world into excess debt. And it is again this exact same mechanism at play in the current US boom phase where $-denominated positions in risk assets are funded by short positions in Yen, Australian Dollar or Euro or whichever currency in the growing pool of currencies that are willing candidates for debasement until such point where capital flight starts threatening their own credit systems and / or the US bubble collapses under its own weight of rising leverage, whichever comes first.

    • I think many people underestimate how the structure of capitalism bakes bubbles, or at least their continuation, into the pie. In most bubbles the start isn’t particularly remarkable and looks like a regular upswing. Then it goes a little farther and the most conservative players slowly exit the market. Then as things keep going the ‘true believers’ start to get a larger and larger share of the market and profits through the standard process of being willing to do more of the business- writing risky mortgages, starting speculative factories, buying more tulips etc. They then have the profits and can expand through both organic growth as competitors exit the market or they simply buy the firms that didn’t join in. Suddenly they’re on the cover of magazines, making loads of money and feeling pretty good about their business acumen.

      And the striking thing is that there’s nothing underhanded about any of this and in fact a good bit to admire since for most of the ride it looks like an old fashioned story of guts, risk and reward. The scams and fraud are there of course, but only tend to surface in their true magnitude afterwards.

      I don’t know enough to speculate if capitalism needs bubbles or any thing like that, but market economies certainly do seem to push them forward without requiring specific villains or anybody being guilty of worse than poor judgement. And I suspect that a good bit of the abuses that are uncovered after the fact aren’t so much a function of morality going wild, but more the result of opportunities and the scope for bad behavior increasing. Sort of like if everybody had to carry a 100 dollar bill in their back pocket at all times, pickpocketing would increase without any need for morality to take a nose dive.

      • Minsky argued, Karl, that you cannot have a stable financial market even in theory because mechanisms that try to reduce risk by imposing stability, government debt guarantees, for example, or Greenspan/Draghi puts, automatically change the behavior of financial systems in ways that undermine stability — your $100 bill story is an example of how this works. The world is volatile and this volatility must show up somewhere. I suspect the only choices we have are to allow lots of small disruptions or, by trying to squeeze volatility out of the system, a few large disruptions.

  7. ^^Michael Pettis wrote: “….But aside from the fact that it would have been impossible for China to run a trade surplus for so long, especially when the concept of reserves did not exist…”

    I won’t speak about medieval China, because my knowledge of it is minimal. However, I would like to point out two things w.r.t. its “sister civilization” of India:

    1) India did run surpluses for most its history.

    According to Michael’s theory, this would be impossible, because running surpluses means importing gold/silver and this would lead to inflation in India, which, in turn, would make Indian goods non-competitive in the world. The only way this is possible is if India had some concept of “reserves” by which the incoming gold/silver could be ‘sterilized’ out of circulation to keep prices stable. This leads me to my next point….

    2) India has always had a concept of “reserves” going back at least to the times of the Buddha (circa 600 B.C.).

    “India, as we all know, already wastes far too high a proportion of her resources in the needless accumulation of the precious metals,” wrote John Maynard Keynes, in his first policy paper 100 years ago. Keynes was in truth repeating a view running from ancient Rome’s Pliny the Elder, to Karl Marx and Victorian economist William Stanley Jevons, all of whom also called India “the sink of the world” for silver and gold.

    Readers can see an example of these traditional 100% sterilized “reserves” for themselves:

    • “Sterilization” and “reserves” are anachronistic concepts that cannot be applied to 6th Century BC India (or to 6th Century AD India, for that matter), and I think it is worth diving into this a little more deeply because these concepts are misapplied throughout history.

      Until the rise of mercantilism in 16-17th century, when mainly sea-faring European nations began actively accumulating gold and silver to finance colonial wars and wars of expansion, different parts of the world exchanged things they produced relatively cheaply for the things they wanted from abroad, and whatever commodity they accumulated, and might have even treated as money (and there were many), 19th Century concepts of central banking did not apply (I am ignoring the very common form of exchange, which includes tribute, in which important people made valuable gifts to each other, because these are even less subject to modern central banking concepts).

      The idea that India exported more than it wanted, and so the equivalent of an Indian “central bank” issued bonds to sterilize the impact of net capital inflows, makes no sense at all. I don’t know India historical trade patterns well enough, so I cannot go into detail further, but if India valued spices, say, at a lower price in silver or gold, perhaps because spices were plentiful and it needed silver or gold for domestic currency reasons, for jewelry, or for religious ornaments (which I believe it did), and Arabs valued spices at a higher silver or gold price, perhaps because they had access to Numibian mines and were not able to grow spices, then as long as the difference in relative value (the “arbitrage”) exceeded the transportation costs and risks, they would exchange the two. Why does the flow of silver into India determine who has the surplus and who the deficit when both sides got what they eagerly sought? Many societies used spices as the monetary unit of account. In that case why not say that the Arabs ran a trade surplus with India and sterilized the spice inflows?

      In most cases the exchange of spice for silver was no different than the exchange of spice for horses, or the exchange of slaves for cowries. Cowries, by the way, were the most commonly used currency for many, many centuries, in many places around the Indian Ocean, in Asia, and even in the Americas, and was a dominant currency even in China, in some places for thousands of years (the Chinese character for cowry appears in many Chinese monetary words). In fact cowries were often much more widely used than either silver or gold, and were especially valuable in West Africa, where gold was available and much less valuable. In fact cowries were widely used in Africa until the middle of the 19th Century, and in some isolated places into the 20th.

      There was consequently a regular flow of cowries going east to Africa and gold going west to India for many, many centuries. So who had the trade deficit and who accumulated central bank reserves? It is a little strange to say that just because silver-and-gold loving Europeans conquered the world before cowrie-loving Africans had the chance, we should define the Africans as running the trade deficit and the Indians as accumulating reserves. Similarly, the gold price of silver was much higher in the areas around China than it was in Spain, so Spanish ships took silver to East Asia and brought back, among other thing, gold and jewelry. Who had the surplus? And when different spices were used as currencies, as they often were, who got to be the central bank? Wouldn’t India be the deficit country? And suppose 19th Century England had decided to peg sterling not to gold but to the ruby. Would it then be fair to say that 15th century Burma ran massive trade deficits?

      The fact that in the 16th and 17th centuries Europeans invented the concept of mercantilism in order to accumulate silver and gold to pay for colonial wars, and then later as their economies were transformed into trading and industrial economies, these same countries gradually invented the concept of a national money controlled by a central bank, does not imply that all along India was running a surplus and accumulating reserves, nor does the fact that the prices of silver and gold did not collapse in India as a consequence of years of net inflow imply sterilization. It implied that India had a very deep demand for silver, which is basically what it means to call India “the sink of the world” for silver and gold. After all Europe for many centuries was “the sink of the world” for spices, not because they settled their trade surplus in spices but because they had a near-infinite demand for it.

      Whenever you hear that a country has been running trade surpluses for centuries, and so accumulating reserves, you should recognize that the speaker is using an arbitrary unit of monetary account in a wholly anachronistic way, and doing so mainly because the Dutch and the English came up with some very useful institutions that fit their needs 400-500 years ago. It is a little like saying that the ritual dance the night before the men in the tribe went out to hunt bison was their version of a heading to the disco to pick up chicks — and why not? There is music, there is dancing, there are flashing lights, and there are chicks, and there is often even some bling. If that ain’t a disco I’m no dancing fool.

      • To summarize, your essential point is that gold & silver were just a part of the current-account trade, and because there was no concept of capital-account in those days, trade must have been balanced (accounting identity) and hence there could have been NO trade surplus (or current account surplus). I understand your point, Michael; what you say is TRUE by the definitions we have today.

        Having acknowledged & conceded the veracity of your ESSENTIAL point, I will refrain from wandering after you into the maze of cowrie shells, African supremacy, cacao beans, bison hunts, chicas, bling, bell-bottoms and discos. I would like to stay on track make one small point for you to examine and possibly refute:

        ^^Michael Pettis WROTE: “Why does the flow of silver into India determine who has the surplus and who the deficit when both sides got what they eagerly sought? Many societies used spices as the monetary unit of account. In that case why not say that the Arabs ran a trade surplus with India and sterilized the spice inflows?”

        Subject to the important caveat that “surplus” here is not being used in the modern accounting sense, I would say that the Indians ran the surplus and the Arabs ran the deficit. The word “surplus” here refers to what would be called “accumulating excess inventory” in a modern accounting sense.

        A) If the spice-currency Arabs ran a surplus in spices and sterilized the spice-inflows by stockpiling them (i.e. accumulated excess inventory), then we should be able to find at least some buried, hidden, locked-up or “sterilized” spice-jar treasure in Arabia, but we do not; and so we conclude that there was no spice-surplus in Arabia. In fact, outside of a few jars here and there, we see no evidence of any buried, hidden, locked-up or “sterilized” spice-jar treasure anywhere.

        B) On the other hand, if the gold-currency Indians ran a surplus in gold (India produces very little gold itself) and sterilized the gold-inflows by stockpiling them (i.e. accumulated excess inventory), then we should be able to find some buried, hidden, locked-up or “sterilized” gold-treasure in India, and we do find lots of it; so we conclude that there was a gold-surplus in India.

        Looking into the difference between spices & gold, although both could potentially act as a medium of exchange, we see that spices were primarily valuable as CONSUMER items, whereas gold/silver were primarily valuable as INVENTORY items.

        • I think you are right but I am too tired to say for sure. All this back and forth between gold, silver, cowries, spices, etc. has left me unsure which side of the ledger I am on.
          By the way I am reading Glyn Davies’ monumental “History of Money”, and after I wrote all that stuff about cowries yesterday, when I went home I checked his book. According to Davies cowries have been used as money longer than any other thing, including gold, silver, copper and paper. It might say something about my limited range of interests, but I am absolutely delighted when I discover things like that.

  8. ” My students at Peking University, for example, are extremely supportive and think very differently about what I do, and I think I have convinced them that as future policymakers, especially in finance and central banking, rather than join the hype that has always accompanied every growth miracle it is their responsibility to be focus on risks and on all the ways things can go wrong.”

    I had a shocking enlightenment after reading this (seriously, I’m not being sarcastic): China might indeed become glorious and its economy, qualitatively wise, might surpass the US’ because of Prof. Pettis teaching to its future leaders! Amazing!

  9. Outstanding article Prof Pettis!

    In an information overloaded world, where soundbites, headlines and twitter feeds dominate, a refreshing view of the interconnectedness (I think this is a ‘real’ word ) of economies. All too often we tend to think outcomes can easily be caused by one simple event or person (the democrats, Merkel, DIlma, etc) but in reality the outcome is caused by a broad set of externalities and the constraints of the system. True enough regional politics is probably becoming a larger force but the global system of payments is still largely understood by most arm chair economists. It was much easier to draw conclusions under the gold standard but in the fiat world it seems even those economists like Prof Pettis or the BIS who seem to get it, still have trouble understanding all the nuances of the current global economy. How will Japan play out? Will Europe somehow manage to escape from its debt burden? Can China rebalance? No one really knows but at least we have a good guide to take us on the journey

  10. Wow. This is an enlightening great piece of essay. There are so many points to think and argue about. Regarding the failure of Argentina after their miracle I read some explanations in John Kay’s “The truth about markets”. If I remember well, he mentioned the failure of institutions as a major factor but he also mentioned “geographical isolation” (long distance from other contemporaneous development centers) as a problem that could have made Argentina more prone to derailment. Kay also mentions New Zealand as another example of failure probably related with geographical isolation.

    This, of course, will not be the case of China because China is so large that is indeed a “center” by itself and cannot be isolated, unless their authorities voluntarily wanted to, and this looks quite unlikely.

    Congratulations Michael (I hope you don’t mind the familiarity). I will re-read your post and make some questions later.

    • I think the geographical differences between Argentina and the US were critical ones. First of all, Argentina’s alignment basically goes from North to South, which means that the time zones and temperatures vary much more mildly. Secondly, the heartland of the US is some of the world’s most fertile land (Kansas). Thirdly, the US borders both the Atlantic and Pacific Oceans while being in a temperate climate zone. Fourthly, I think Argentina lacks the same diverse nature (at least economically) as the United States.

      In most of those factors, I’m afraid China cannot compete with the US. China certainly doesn’t hold some of the world’s most fertile soil and most of China consists of very harsh terrain. Also, almost all of China’s population lies on its Eastern regions. Also note that most of the countries that border China–India, Japan, Vietnam, Malaysia, Taiwan, and South Korea—are all hostile towards China. In other regions of China like Tibet and Xinjiang (these two provinces combine for about 30% of China’s land mass), much of the populace isn’t very fond of the Chinese government. I wouldn’t be the least bit surprised if you were to see India, Japan, and even the US fund separatist movements in these places.

      Don’t believe me? Here’s the proof:

      If I were running Indian or Japanese foreign policy, I’d already be funding separatist movements in Xinjiang and Tibet. I’d also be trying to undermine the Chinese central government as much as possible.

      • Suvy

        The notion of funding separatist movements is long since passed.
        The problems associated to China, are serious, and in many environmental areas more than you mention, but the notion that it is the interest of others to fund China, as if a destablized, factional CHina, would suit anyone else in the area is poor thinking, reminiscent of the early period of decolonization. It is more suited to entertainment, along the fiction based narratives of Hollywood, and Bollywood, movies, than serious analysis.

        Please refrain from such non-sense, it is counter-productive, and paranoid inducing among groups who may very well be decision-makers, a very poor place to place one’s assumptions.
        By your very own analysis, motivations need not come from external actors, and the interdependent nature of global systems would not benefit from a destabilized nuclear China, in a very populous region, with historical, and present, antagonisms. No need to fan such a fire. It is irresponsible and misplaced.

        • I think (I basically KNOW) it’s in India’s interest to fund rebel groups in China. I was born in India BTW.

          I don’t think it’s crazy at all. China and India DO NOT like each other and many Indians view the Chinese government as two-faced liars. I don’t see why it’s crazy to say India could try to fund groups in Tibet and Xinjiang as the places are right on the Indian border with an authoritarian country that’s looking to expand its influence into the Indian Ocean.

          India would be THE first country to benefit from destabilizing China. Anyone saying otherwise doesn’t know what they’re talking about. Just look at what China did to the native Tibetans. Do you think they’ll do something different to Indian groups if they try to take Indian territory? Gimme a break dude.

          • Guys, lets keep the comments a little less personal. I have had to delete three or four that were unnecessarily rude.

          • Ok, not sure what the numbers are today, but half a dozen years ago, China had 7 divisions of PLA, and multiple nuclear tipped warheads pointing down from Tibet onto India. The waters of South Asia and East Asia descend largely from the Tibetan plateau. Bangladesh and India already fight for water, to say nothing of what will occur if China moves forward with some of their more ambitious water diversion plans. South East Asia is already being impacted, the livelihoods of fisherman, and peoples along the Mekong, as regards, electrification efforts, damming the Mekong, and similar (saltification of freshwater rivers, silting, pollution, 80 million people in the Mekong Delta alone).

            String of Pearls, China is investing all around India, seeking to gain parity with India’s Navy in the INDIAN ocean. China foreign policy in South Asia, it’s all weather relationship with Pakistan, is to keep India pre-occupied by an existential threat on its Western border; as it presses its territorial claims in the East (and you and I know what the BJP wanted to do a decade (and a half) ago to Pakistan). China is making investments all around the region, from Gwahar near to India, to Sri Lanka, and the Maldives. Further, we know the situation in Bengal, and who has supported what there, even initiated what exists there, which of course has been a terrible inhibition on India’s development (both instability and the long-term leading parties). Then, China has been building roads along the border with India, airports, in the region, ports around India, and passes to Pakistan (which India will easily be able to close, in the case of hostilities, due to their marginal utility in the present case). So, China is doing all of this, and that is true, for the first time in history in borders are more secure than ever, if their economy is becoming fragile, however, i think that it is not productive to take those, who have been ingraining a notion of humility and shame into their masses, and feed non-sense about arming insurgents, even if China has done this to India directly with the Naxalites themselves. I can understand your concern, even has they attempt to keep India pre-occupied with Pakistan, even as they place strategic investments, and dredge deeply the ports, around India. Not least because it can work to rationalize those very actions themselves, at least to the masses of the misinformed and manipulated. On the other hand, I am not so erratically hyper-ventilated as the Indian Financial media, of late, or in regard to the BRICs bank, not least because the amount of investment to India from China has been marginal at best, is only a fraction of what the Japanese recently promised, is on a proportional basis smaller than what was yesterday promised to Spain, and likely portends directions in regional relationships overall, and frankly, i suspect these not to be terribly good for the Chinese more generally, so again, no use it spreading rumors, or inflammatory notions, when in the end, it does seem they are creating enough antagonisms for themselves more generally, and frankly, considerate of what I know of cultural ways, I would assume they do this not from a position of strength, because it would seem to be far too early in the process to do such.

          • The Chinese investment across the world isn’t something I view as a positive. The US is already working on containing the Chinese and India has signed deals with Japan. The US is already supplying Japan, South Korea, and a whole host of other places with military technology.

            The problem for China is that they’re surrounded and all of their allies are linked via land. For example, you cited Bangladesh and Russia is another Chinese ally. Almost all of the trade networks are

          • The Chinese investment across the world isn’t something I view as a positive. The US is already working on containing the Chinese and India has signed deals with Japan. The US is already supplying Japan, South Korea, and a whole host of other places with military technology.

            The problem for China is that they’re surrounded and all of their allies are linked via land. For example, you cited Bangladesh and Russia is another Chinese ally. Almost all of the trade networks are linked by land.

            By the way, it takes DECADES to build a navy. A navy is very expensive and the US has, by far, the world’s largest navy. For example, the US has around 12 aircraft carriers. The Chinese have 1 that was an old Soviet ship. I know, for a fact, that the current Chinese leadership is scared with a confrontation with the US. I also think the US has been instigating the Chinese government, but that’s a different issue.

            You’re going to see wars or proxy wars in these regions. If the current situation holds, it’ll be countries like China, Bangladesh, Pakistan, and maybe Russia against India, Japan, Taiwan, Malaysia, Vietnam, and the US. The US will be the determining factor and the Chinese navy comes nowhere close to the strength of the US Navy or the USAF.

            If push comes to shove, China will be the first one to break. I don’t think the center of the Chinese government can hold. This stuff has happened in Chinese history many times before and I see no reason why it won’t happen again. Sea power always beats land power because it’s orders of magnitude cheaper to trade by sea. In this case, the deciding factor will be the US and if the US gets involved, I don’t see China having a chance.

  11. Dear Mr. Pettis,
    I very much enjoy your articles, but for a man with your international background you seem to know very little about current conflict in Ukraine: The US was very heavily involved there, even more so in the last 5 years.
    You seem to ignore your own rule, concentrating in your analysis on what Russia ( Putin) did and is doing there and ignoring what the US has already done. A little inconsistent, dont you think?
    Best regards, Jon.

    • Sorry, Jon, but I certainly do not mean to imply that I know much about the Ukrainian crisis beyond what I see on the BBC, and of course I do know that this country is important for Russians, whose interests have been treated a little cavalierly in the past decade by the West. I only mentioned Putin disparagingly because I think the Russian economy has been structured so badly in recent years, allowing it to function only as long as commodity prices are very high (this was true too, by the way, of the USSR in the 1970s), that it will almost certainly suffer brutally in the next decade as metal prices collapse.

      Moscow should be focussing all its attention on restructuring the economy while commodity prices are still high, reducing the dependence on commodity revenues (instead of increasing it, as they seem to be doing), paying down debt, and trying to create as much space as possible within the international environment to give Russia additional flexibility as it is forced into a tough adjustment. Moscow seems however to be doing the opposite.

      And if the events in Ukraine set off a regional arms race, it will be a little like the Reagan arm’s race in the 1980s except that this time there will not have been an explicit attempt by anyone to bankrupt the country. It will happen as an unexpected consequence. Even as Russia increasingly sidles up to China as one of its sole powerful friends, my Chinese friends seem astounded by what the country is doing, suspicious of its intentions, and very worried about the consequences. Last week one of my former students, now a banker, complained at dinner, only half-jokingly, “why do we always get the Kim Jung-uns, the Mugabes and the Putins?”. The dinner was with a group of my former Tsinghua University students, all of them (alas) now investment bankers, and all of whom laughed. While I am not suggesting these views are shared by all Chinese, given Russia’s history and its importance it is surprising to hear his name associated even jokingly with the other two.

      • uh, so you are not teaching future leaders, you are teaching future INVESTMENT BANKERS? Great, glad to see your wisdom is not wasted…

        • Is that last comment really necessary? Unless you personally know the students, you shouldn’t be making comments like that.

          Back to the topic at hand, there’s a lot of stuff that’s going on in Ukraine and I don’t think it’s fair to look at Ukraine isolation with all of the other stuff. I think everything is interconnected and, as Prof. Pettis noticed, the economic side cannot be ignored. If Prof. Pettis is right about the economic aspects of Russia, I think we could be talking about a real risk of fragmentation within Russia or we could see an expansion of Russia and a return of the Russian empire. Ironically, we may end up seeing both.

          The discussion here actually led me to write a post on the entire situation in Ukraine. I discuss several possibilities, including the expansion of the Russian empire (currently the Eurasian Union) and the possible fragmentation of the modern day Russian Federation. If anyone here is interested in my take of the situation, take a look at the link below.

          • Suvy,

            Having read Prof. Pettis writing for so long, I am sure that if he actually read my comment that he thought about it somewhere in between of “not worth thinking about” or “amusing because it holds some truth.”. My guess is closer to the later.

            And, YES! I do think it’s necessary! I think it’s high time writing by Prof. Pettis be in the New York Times and Bloomberg and whatever journals in Europe. He is one of the few who gets it and able to write it in simple terms for many to understand! It’s not his responsibility and he doesn’t owe anything to anyone but I hope he starts to proactively put his word out there so it might cause a change.

      • It is funny, having lived in Georgia, and experienced the love, more hate, relationship that can exist between Russia and Georgian, Some Russians, and many, yet, not all Georgians, even Georgians who are half Georgian, half-russian, I have long reflected on the irony of Putin, in his neo-imperial project, and his admiration for Stalin, in manipulating the elderly great war masses, and how the world, Russia itself, would have been different, had Stalin, a Georgian bank robber for the party, not been appointed the lowly position of General Seceretary of the communist party, which only became important after Stalin in communist parties globally, how Putin, admires Stalin, and how Stalin, effectively destroyed Russia, and where the world, would likely been a very different place, had Stalin not purged successive generations of the most competent Russia leadership with continuous political and military purges in the run up to the Great Patriotic War itself, and the millions of other Russians, he killed, and how this has created Russia’s demographic picture today in many ways, while Stalin himself, was a Georgian, where Georgians, even those who are half Russian themselves, are passionately nationalistic, as Putin, uses Stalin to re-establish Russia’s imperial roots. the irony.

      • Prof. Pettis,

        I think Russian geography plays a huge role in all of this. Russia is a very large and diverse country with harsh terrain where infrastructure to connect these different areas is expensive and difficult to maintain. Russia has no warm water ports (except for Crimea in the Black Sea), which means they have to exclusively trade by land. Note that trade by land is orders of magnitude more expensive than trade by sea.

        I agree that Russia should restructure their economy, but it’ll be difficult. Russia has always been economically incompetent, but they are significant militarily. What I suspect is that Putin ends up having no choice but to start expanding and building his empire as his economy goes south. In other words, this means more proxy wars.

        Also note that American (and European) sanctions do not help the Russians rebalance their economy. It almost ensures the exact opposite.

    • Dear Professor Pettis,
      Thanks for a reply.
      I very much appreciate your opinion and taking time to answer my questions. Always a pleasure reading your articles and comments.
      Can you please explain to me, what exactly Russia is doing wrong right now? In the last 7 years it paid off its IMF debts, it created a reserve fund with a basket of currencies and gold for a “rainy day”. From what I understand, it is trying to decrease its dependence on the west companies in different technology, pharmaceutical, etc. areas. What should they be doing different?
      As far as your former students comments on Putin, perception is reality, is it not?
      Russia has been surrounded by NATO forces for many years, and now NATO is openly hostile to Russia. Ukrainian current “government” is threatening Russian population in the East part of the country and is trying to become a part of NATO as well. I think under the circumstances, Putin is doing amazing job trying to stay calm and not to react to provocations. But all we hear in the West, he is a bloodthirsty aggressor.
      Imaging for a second, USA lost the cold war and Russia put their tanks in Canada and Mexico as part of ” Warsaw pact”. How would Mr. Obama react?
      Best regards and looking forward to your reply.

      • I completely agree with you on Putin. Everything you hear about Putin in the West is really just war propaganda.

      • I think I would read things a little differently on the topic of Ukraine, but these differences will reflect real differences on what is and what isn’t legitimate self-interest. I acknowledge that Russia needed a strong leader, and probably one that wouldn’t be loved by the West because I guess Russians are overly sensitive to opinion in the West, and after the very difficult decade following 1989 it was probably important that a Russian leader, would go out of his way to act, ironically, as if he were indifferent to the opinion of the West.

        I have always thought, by the way, that one of the reasons Hitler did well in Germany was that German leaders in the 1920s bent over backwards to accommodate Europe, and after the humiliation of 1918 and the following decade, the failure of Europe to acknowledge what the German’s felt was both their humiliation and their attempts at reconciliation inevitably hardened German attitudes. I think if Russia had had more “responsible” leaders, along the line that Germany had in the 1920s, it would have only frustrated nationalist opinion in Russia even more.

        But of course this has nothing to do with what I think Putin has done wrong economically. As I see it he inherited an economy that was already in pretty bad shape, with a very dangerous distribution of wealth, entrenched vested interests, and a very weak balance sheet that had already set off one round of defaults, and one of the worst aging problems in the world.

        But then he won the lottery. Beginning in 2003 China’s growth miracle set off an astonishing rise in commodity prices that absolutely no one expected. This was also a time of surging global liquidity and easy availability of capital.

        This wasn’t the time to worry about Russia’s standing with foreigners. It was a great chance to repair the country’s balance sheet and impose a series of difficult reforms that restructured the economy, strengthened legal institutions, and otherwise opened Russia up to its proven capabilities in science and technology (and value-creating entrepreneurialism). These reforms are never easy because they are likely to be strongly opposed by vested interests, but with soaring commodity prices and global capital desperately looking for investment opportunities, history suggests that he would have been able to pull it off.

        Instead it seems to me that he did almost the exact opposite. The enormous windfall was squandered, and instead of breaking open the restrictions that had locked the Russian economy down for so long and constrained the ability of ordinary or talented Russians to create wealth, he seems to have reinforced them. In a way it is worse than what happened in Venezuela. For all the criticism Hugo Chavez has received, I think the Venezuelan elite had seriously mismanaged the economy and so the fact that they have been pummeled may not exactly be a tragedy. More importantly, it seems to me that while Chavez wasted a wonderful opportunity when oil prices went through the roof, at least the poor in Venezuela have, by many measures, come out ahead.

        But Russia didn’t even do that. As far as I know Russia squandered its sudden windfall as wastefully as Venezuela did (although at least Venezuela never had to suffer the staging of an Olympics event), but while doing so Russia actually reinforced its existing elite and did little to improve conditions for the poorest or the worst off. I haven’t check numbers, but it seems to me that many social indicators headed down just as Russian income was rising to peak levels. It was worse than the USSR in the 1970s, when the country was saved from its own economic problems by soaring oil prices, but then didn’t make the tough restructuring decisions which oil would have paid for. By the 1980s, once oil prices dropped, the USSR probably didn’t even need the Reagan arms race to cause the country to collapse.

        Few things are as clear in history as the danger of excess dependence on commodity prices. When hard commodity prices drop, and I expect them to drop a lot more, I worry that we would have already seen worse economic chaos in Russia than we will in Venezuela, and with the recent tensions in the region I can’t help but think that while Russia is trying to adjust, it will do so in the midst of another arms race, very anxious and angry neighbors, and an uncooperative US/Europe. In short everything will go wrong at the same time.

        I understand the rage many Russians feel towards foreigners, but I think it may have been smarter to worry less about the opinion of the West and more about the problems at home. I really don’t know what Russia will do when commodity prices have dropped another 40-50%. The one thing that is pretty certain is that Russia’s great wealth of talent in science and technology seems to have benefitted the US more than Russia, and it will probably only get worse.

        Is my reading way off? What do you think will happen when commodity prices drop?

        • I agree with you on the economic consequences for Russia too. I think Putin’s got his back to the wall and I think the Americans smell blood and are going in for the kill.

  12. This is just a wonderful blog, and I have learned so much from your insights. It has certainly expanded and changed my views on a number of things.
    “China’s extraordinarily high savings rate is almost wholly explained by the transfer mechanisms that subsidized rapid growth over the past two decades, leaving Chinese households with the lowest share of GDP in the world, and perhaps the lowest ever recorded for a large economy.”

    In the discussion of Germany and Spain, hard not to think about the insight regarding balance sheets and how it all….uh, balances.

  13. Uh oh – every period of rapid growth has ended dismally. Yet you seem relatively optimistic about China’s prospects.
    Can you square the circle? or perhaps I have misunderstood you?

    A dynamite blog – it would be the best if it were more frequent, but then, if it were more frequent, no doubt it would dive deeper…
    Thank you,

    • It depends what you mean by optimistic. Most people think think a prediction of 3-4% average growth as the upper limit during 2013-23 is terribly gloomy, although three years ago they would have thought a 7% prediction was terribly gloomy. But to believe that China is more likely than not to have an orderly adjustment doesn’t mean that a disorderly one is impossible, or even improbably. The more debt there is, the fatter should be the tails of your probability distribution, and their fatness is not symmetrical. Debt makes the left end fatter than the right.

      • Thank you, good answer and helpful.
        Yes 3-4% is gloomy, but also not a disaster. I was wondering what your feeling was about a disaster, in the sense that the transition happens with some kind of discontinuity and is disorderly for some period during the ten years.
        I like your answer to that, it is exactly the way I would think about it. some positive probability (though less than majority) described by a rather unfortunate fat tail.

        I also was intrigued that you felt the evidence was consistent with Xi aiming towards transition to consumption from investment. I think from the uninformed outsider’s perspective the evidence could be consistent with either a consolidation of power or with actual rooting out corruption to facilitate a transition in the economy.
        Would you be willing to comment on why you are on leaning towards the more optimistic view?

        Thank you

        • Why is lower GDP growth a disaster if it involves a healthier economy? That makes no sense. What would be a disaster is if you continued with these growth rates and have the country resort to extremely destabilizing policies in order to maintain such high growth rates. In the case of the latter, you’re transferring risk to the future for more growth today. Nothing can be more dangerous to a society than such kinds of policies.

          Expecting China to take on lower growth rates for healthier growth isn’t a pessimistic view at all–it’s the optimistic one. The pessimistic view is to expect China to maintain extremely high growth rates until everything comes crashing down all at once.

          • Slower GDP growth is not the disaster (so called in this conversation), the disaster would be a financial crisis or recession or some other ‘event’ that was precipitated by the change in the economy being driven by investment to one being driven by household consumption.

            Its not hard to imagine that the ‘right’ speed for China to grow is one that ‘fully’ employs its labor force and does so in a way that per-capita GDP continues to rise towards developed world levels.
            Achieving those two objectives would imply rapid growth by any measure except perhaps China’s own past 30 years of growth.

          • How are you measuring capital? Building more robust institutions would be very beneficial for China. Building condos in the middle of nowhere and calling it a fixed capital investment? I’m not so sure.

  14. a simple question Michael, aren’t you basically advocating currency war? Isn’t your proposed descriptive scenario ignoring prescriptive policy implications? You’re assuming currency values only reflect a bilateral trade balance, aren’t you?

    • I don’t see why you would think that, Michael. My argument is not aimed at promoting beggar-they-neighbor policies. These will happen anyway. After all no one needed me in the 1930s to justify currency war. It happened then and will happen again whenever global demand is weak and unemployment is high in countries suffering from highly unbalanced trade.
      Beggar-thy-neighbor is rational for individual countries even as it is terrible for the system. If we don’t understand why concerted and coordinated action, and not moralizing, is the only way to solve the problem, then we are unlikely to solve it.

  15. If you enjoy watching economic sausage get made I recommend Brinkley and Nichter: The Nixon Tapes. Aug. 71 Nixon severed the dollar from gold, announced a 10% tax on imports, a business tax credit and wage and price controls – before the 72 elections. The tapes record the (sometimes hilarious) 30 page discussion between Nixon; his Treasury Sec. Connally and George Schultz.
    (p. 234) Nixon: . . .but nobody knows what the public reaction will be to the gold window, I mean, because, frankly, good God the people that are the experts don’t know what the hell it ought to be!
    (p. 239) Connallly: No, Mr President, after all, this international monetary thing, in a way, it’s a mystery, and in a way it isn’t a mystery.

  16. ^^Michael Pettis wrote: “….But aside from the fact that it would have been impossible for China to run a trade surplus for so long, especially when the concept of reserves did not exist…”

    I don’t have access to data for China of that time, but we do seem to have some data for British Colonial India (with some opium statistics!). Interested readers will have to do some work because the old file is a little disorganized without table or page numbers. Here it is:

    A) TABLE I: Keyword-search in the file the following words: “the total value of the imports and exports of the Indian empire”

    In the table, you will see that India was running an average trade SURPLUS (exports> imports) with the WORLD of 20 Million pounds a year during the 1870s.

    B) TABLE II: Keyword-search in the file the following words: “extent of the commercial intercourse between India and the United Kingdom”

    In the table, you will see that India was running an average trade surplus (exports > imports) with the UK ALONE of about 6 million pounds a year during the same period.

    NOTE: As Michael has correctly pointed out, gold & silver are INCLUDED in the trade figures above. They are listed as the import/export of “bullion & specie” and “treasure”. Michael, how was India able to run these large continued trade surpluses? Was there a capital-account in which there was a deficit? Was India accumulating foreign-equity or foreign-debt claims via a capital-account?

    C) TABLE III: Keyword-search in the file the following words: “total gross amount of the actual revenue and expenditure of India”

    In the table, you will see something curious: On average 12 million pounds a year of India’s tax collection was being ‘transferred’ to England during the 1870s and is NOT a part of the trade statistics in (A) or (B). As Michael correctly points out, even though this may not be listed as part of the TRADE statistics, modern accounting would still list this ‘transfer’ as a part of the CURRENT ACCOUNT. Of course, this 12 million pound ‘transfer’ could have returned to India to “pay” for some of the trade surplus. This may be the one possible explanation for the continued trade-surplus (but not necessary current-account surplus) that India was running during in 1870s. Michael? Any comments?

    • I don’t know the details for India, but of course by the 1870s the modern balance of payments structure, in which there are central bank reserves that can accumulate or decline, is no longer an anachronism. If India was running a surplus on the current account, of course it must have run a deficit on the capital account, and although the causality can run either way, the capital side can be explained by a number of reasons, the three most obvious, to me, are 1)that wealthy Indians, or English residing in India, exported their savings to London by buying gilts or other assets, 2)that large investments into India in previous periods were being repatriated, and 3)if the Indian rupee were backed by sterling, as I think it was, expansion in the Indian money supply required net purchases of gilt. Any of these would be enough to explain why India had to run a current accout surplus (and explanation 2 would probably suggest that at least part of the CAS could have been dividends). I am just guessing, however.

      • ^ Michael Pettis wrote: “….1) that wealthy Indians, or English residing in India, exported their savings to London by buying gilts or other assets….”

        I did some checking, Michael, and I find that the Europeans (not just the English, but ALL Europeans, including English, Germans, French, Portuguese, Dutch, White-Americans et cetera ) residing in India in 1891 were about 170,000 in a total population of 286,912,000 (or about 0.05% of the population).

        It is of course possible that this 0.05% of the European composition of the Indian population, regardless of their actual nationality, were buying English guilts or other English assets. Even if this were not true, it is still quite possible that wealthy Indians were indeed buying English guilts or other English assets.

        To better understand this, however, I think we need more input from the blog-participants here who are in now in England/Europe. Anyone? Any more information for us on this matter? Any input would be much appreciated. This seems a wonderful opportunity for all of to learn, and it would be tragedy if we let just let it slip by.

      • Michael Pettis wrote: “….2) that large investments into India in previous periods were being repatriated, and…..”

        Here is some information about that OTHER (previous) colony that traded with the British empire– the United States:

        According to the linked article, it looks like the US ran a sustained trade DEFICIT with England from 1770 to 1920 (probably due to large English investments and also due to debt incurred by borrowing from London to finance the agricultural & industrial expansion in the US during the 19th century). It was only AFTER 1920 or so that the US appears to have run sustained trade surpluses to pay back the English lenders and also to repatriate previous English investments. In the US, this is a generally well-known and widely-discussed trade-pattern amongst economists.

        So here is the extremely curious point: Why is India ALREADY running large & sustained trade SURPLUSES of around 20 million pounds a year by as early as the 1870s, presumably to repatriate previous large investments into India, when the FIRST large English investments began to come INTO India only around 1850 or so (while before that the English were mainly traders rather than investors in India)?

        There seems to be something strange going on. It would be nice if some of the English/European participants on this blog could get some information through their local knowledge-networks and then kindly throw some more light on this curious point.

  17. Dear Michael –

    You’ve probably read Jamie Caruana’s recent speech (at Harvard in April). He presents two interpretations of the global economy, and says that “The first, quite widespread, view emphasises that the key problem is a persistent shortfall of global aggregate demand that calls for further traditional expansionary policies. For brevity, I will label this the ‘shortfall of demand view’. The second, less familiar, view maintains that the key is removing the impediments to growth that are the legacy of a balance sheet recession. I will label this the ‘balance sheet view’. I shall argue that the balance sheet view provides a more convincing overarching interpretation of what has been happening in the global economy in general…”

    He continues with an outline of the major arguments each view contains; the balance sheet view appears more compelling. It includes much logic and argument found on this blog. However, his prescription seems to me quite different from yours – or at least from what you deduce would be the healthy way forward.

    In particular his emphasis is “not so much mechanically to fill an output gap through traditional demand management. Rather, it is to establish the basis for a self-sustained and prompt recovery through aggressive balance sheet repair, resolving the legacy of the crisis and limiting the risk of chronic weakness.” Sounds ok, though a bit vague. The more specific recommendations offered are that “Fiscal policy should keep a close eye on long-term sustainability: it should consolidate where fiscal trajectories are unsustainable and make room to use any available firepower to support the restructuring of balance sheets, such as through banking system recapitalisations,” and “Prudential policy should strengthen financial institutions’ balance sheets.” Meanwhile, “monetary policy should work together with prudential and fiscal policies to address the debt overhang-poor asset quality nexus head-on. It should also give way to structural policy, to reduce other impediments to growth. And in deciding the necessary degree of accommodation, monetary policymakers should consider carefully to what extent disinflationary pressures result from positive supply developments or from a domestic shortfall in demand.”

    Taking a step back, we can see good reason for this emphasis in two recent papers you must also be familiar with:
    1. Claudio Borio’s et al BIS working paper no.457 (from last month) which claims “too much attention has been paid to the current account and far too little to the capital account. This is true of both formal analytical models and historical narratives. This approach may be reasonable when financial markets are highly segmented. But it is badly inadequate when they are closely integrated, as they have been most of the time since at least the second half of the 19th century. Zeroing on the capital account shifts the focus from the goods markets to asset markets and balance sheets. Seen through this lens, the IMFS [international monetary and financial system] looks quite different. Its main weakness is its propensity to amplify financial surges and collapses that generate costly financial crises – its ‘excess financial elasticity’. ”
    2. Zoltan Pozsar’s OFR working paper, “Shadow Banking: The Money View” in which he describes (in startling detail) shadow banking “as the financial economy reflection of real economy imbalances caused by excess global savings, slowing potential growth, and the rising share of corporate profits relative to wages in national income.”

    Focus on the immense role played by the global financial system (positive/negative liquidity shocks) – echoing points you make in The Volatility Machine – seems like a critical contribution to the story. But perhaps too much emphasis can be put on financial institutions’ balance sheets. The modern financial system permits, magnifies, and transmits real-economy imbalances, but repairing and properly regulating that system – while vital – is not a sufficient solution. (Pozsar’s paper seems to more in line with this.) Or can it?

    Repairing financial institutions’ balance sheets and improving productivity is obviously a ‘virtuous,’ more sustainable approach to growth. But, as you argue, we would also see more sustainable growth with, say, rebalanced household income and consumer spending in China and Germany. Or slightly diminished inequality in America. Or limits to foreign reserve hoarding of US treasuries. And those strike me as – at best – indirectly related to financial institution’s balance sheets (the “debt overhang-poor asset quality nexus”). What do you think? Might bank recapitalization and rate-raises do the trick?

    Perhaps another rebalancing must occur – between focusing on the global financial system and the real economy.

    Caruana’s speech:
    Borio et al paper:
    Pozsar’s paper:

    • Rate raises doing the trick? What part of the yield curve you talking about? If you’re talking about the short end, that’s the way to send the country into a depression as you’d be inverting the yield curve. For long end rates, I agree. The problem is how. Long end rates basically move with NGDP expectations (plus a risk spread), which means you’ll have to figure out a way to get NGDP higher. In other words, we’re back at square one.

      • The comment was sarcastic; I don’t think raising rates will do the trick.

        My hope in that comment was to get Professor Pettis’s opinion on a debate that seems to be going on regarding the Great Rebalancing of the world economy: on one side you have people suggesting the global financial and monetary system caused the problems – and holds the solution (bank recapitalization, less accommodative monetary policy all around, central bank positioning as dealer-of-last-resort, global currency coordination etc etc). On the other side, people emphasize the imbalanced production and consumption of goods and services; they concentrate on the non-financial economy.

        Now, obviously these views are not mutually exclusive, and one suspects the best answer is a combination of the two. Because Mr Pettis calls himself a balance sheet guy, and focuses on both the real side (current accounts) but also is an expert on the financial side (The Volatility Machine), I thought he would have some interesting thoughts.

        In particular, Borio (roughly) highlights “excess financial elasticity” as the major culprit – and leaning against this excess (mainly through tighter, more prudent monetary policy) as the solution. Pozsar’s stunningly detailed paper shows exactly how that excess works (institutional cash pools; money market funding of capital market lending etc etc) and suggests both real and financial market reforms as possible solutions.

        Again, the debate seems to have two sides: the current account side (savings glut/safe assets shortage) and the monetary/financial side (excess financial elasticity). And, again, I think the debate presents a bit of a false dichotomy – both sides are true, and in fact each depends on the other. I expect Mr Pettis agrees; I hoped he would give his opinion on why the debate has been so formed – what precise flavor of muddled thinking leads to it.

        But instead of his reply, I got yours! 😉

        (By the way, my characterization is exactly that: a characterization. I don’t expect Caruana/Borio etc would deny the connection between the two sides. Yet I find it interesting that a particular side is singled out for special attention. Why not tell the whole story: imbalanced saving and consumption is facilitated by an exceedingly elastic financial system: rebalancing must occur on all fronts.)

        • In fact I had not heard of Cauana’s speech, Alex, and am delighted you mentioned it because it immediately seemed interesting to me. I have only had time to read it quickly and superficially, but my reaction is, as I think you expected, that these are not really alternative explanations so much as obverse sides of the same coin.
          I would argue that there has been structurally weak demand for the past one or two decades. This was caused largely by rising income inequality as well as the contraction in the household income share of GDP in places like Germany and China. The consequence, I would argue, is that consumption would have declined, but, and this is why I always turn to the accounting identities, it is clear that you cannot simply move one side of the equation without a corresponding adjustment.
          As I tried to show especially in my March 23 and May 8 entries, the corresponding adjustment had to be either an increase in unemployment, an increase in productive investment, or an increase in debt, and because except perhaps in a limited way in a few developing countries productive investment globally has not been constrained by insufficient savings, this left us with only the other two adjustments.
          For lots of reasons that I probably don’t need to get into, before the crisis we “resolved” the savings imbalance with rising debt, which merely postponed the demand shortfall by converting it into a balance sheet problem. Now we continue to suffer from structurally weak demand but it is being exacerbated by what Caruana calls the “balance sheet view”. Unemployment, in other words, is the current form of the adjustment.
          There is nothing new in any of this. I think you can easily argue that you will find a similar circumstance after the 1873 crisis and a similar analysis in the 1880s and 1890s work of John Hobson and Charles Arthur Conant, and another similar circumstance after the 1930-31 crisis and anther similar analysis in the work done by Mariner Eccles, Irving Fischer and Keynes in the 1930s. The timing isn’t a coincidence, of course.
          I will read Caruana’s speech more carefully and try to come back to it, but I am glad that we seem to be rediscovering economics after so many decades in which most of our time seems to have been spent in designing a very sophisticated model of an unrealistic “special case” of economics. In The Great Rebalancing I quote an economist who pointed out already in the 1840s that after every crisis we get a huge number of useful and interesting “pamphlets”. Nothing has changed.

  18. Conferring with other readers, wonderful interview with lots of engaging insights…thank you.

    My question is regarding inequality, and your prescription to remedy it. You reference inequality in numerous place, US, China, Argentina, but I will focus on the US.

    You state:
    “Generally speaking I would argue that in most countries we need to boost the wealth of median households at the expense either of the state or of the economic elite, but in the case of the latter I also recognize that we have to do so carefully. Income inequality may itself be the outcome of a highly desirable incentive structure that rewards innovation and entrepreneurialism.”

    I also support boosting the “median income” at the expense of the state and the economic elite. However your prescription (remedy) for the USA, increases the share of the federal state, and the cronies (economic elite) who build the roads, telecommunication pipes and bridges.

    You state:
    “Unfortunately this analysis leaves us with policy recommendations that are unpalatable to both sides of the aisle. The US government must take the lead in rebuilding US infrastructure, which probably means increasing government debt…

    …There are really only two ways to increase household consumption sustainably. One is to force a redistribution of income from the richest Americans to the rest. The other is to impose trade tariffs or, what amounts to the same thing, to tax foreign purchases of US assets, especially US government bonds, in order to drive down the current account deficit and so allow the US to retain a larger share of what has become the most valuable commodity in the world: demand. ”

    All of those remedies you mention increase the power of the state, and most importantly IMO is that gov’t designed income redistribution, tariffs and taxes on foreign purchases destroy entrepreneurial individuals/companies and distort price signals necessary for economic growth. You explicitly mention that “inequality” must be solved carefully and in a way that rewards innovation and entrepreneurialism. Please expand on that subtle idea if you may.

    “Demand” in the USA is exceptional because it has relatively free economic citizens to purchase goods. The rest of the world has consumers either economically repressed (ie China), or bound up by taxes and tariffs to destroy demand (ie Nordic countries). When measuring disposable income, or true consumer demand (not GDP/Capita, or IMF-derived PPP), the USA citizen is far wealthier than citizens in Norway and Switzerland, which rank as the wealthiest places.

    The term “inequality” is generally bantered about imprecisely, and any statistician can create a measurement to augment their narrative,. You have an excellent definition: When the State and Economic Elite lower the median wage, the impact is slower economic growth and dynamicism. Instead, if you measure inequality as the distance between the 1% wealthy and the impoverished (ie Picketty), then your goalpost is to dampened the dispersion of wages, and make everybody equal like the 300k souls in Iceland. That in not good for economic growth, and that is what I find unconvincing about your remedies for the USA.

    Widely dispersive wages, in a contra-Picketty-sense, are a good thing (Lipsey & Swedenborgis, 1993,98) for economic growth, entrepreneurial activity, and efficient allocation of labor and capital. Whereas widely divergent wages for government-privileged economic actors compared to private economic actors are destructive to economic growth and consumer demand. Defining inequality precisely, rather than a sound-bite is critical.

    The Gini-Coefficients in the Central Asian countries are similar to the Nordic countries- except everyone is equally dirt poor. And the current Russian economy is a case study in the excess rents earned by friends of Putin, compared to entrepreneurs like Mikhail Khodorkovsky. alas. Defining inequality relative to the state-privileged, rather than to a the burger-flipper is the path to economic rebalancing.

    My remedy for the global scarcity of demand would be policy actions to increase the dispersion of wages (reform labor laws and trade prohibitions), and reduce the size of governments, so the economic rent from government-privileged companies is reduced relative to the economic rent earned by actors in the private sector (What Xi is purportedly doing, but not Obama)

  19. If only we had listened to Keynes back at Bretton Woods and not Harry Dexter White and we adopted Keynes’ Bancor back then things would have been much better for everyone!!!

    “Keynes saw a balance of payments imbalance as a problem for both surplus and deficit countries, both of which needed to be encouraged to change their policies. White saw a balance of payments deficit as the problem of the country running the deficit alone.
    These are important differences. When Keynes disagreed with White, he usually lost the point because of the greater power of the United States. And in almost every case it seems to me that Keynes was probably right: it was a bad thing that he lost the points at issue…” -Brad DeLong http://delong.typepad.com/sdj/2013/04/review-of-robert-skidelsky-2000-john-maynard-keynes-fighting-for-britain-hoisted-from-the-archives-from-twelve-years-a.html

    • “White saw a balance of payments deficit as the problem of the country running the deficit alone.”

      It’s always like that, isn’t it? Deficit countries usually see trade imbalances as consequences of distortions that must be corrected on both sides, whereas surplus countries prefer to see trade imbalances as resulting from imbalances in virtue. Of course in those cases where the deficit countries are right, but the surplus countries refuse to cooperate, the tendency is for trade tensions to rise, and if they result in trade intervention, the resulting reversal of the imbalances almost always leads to rising GDP growth and declining unemployment in the deficit country and the opposite in the surplus country. If countries like Spain were to leave the euro and depreciate, they would probably suffer a year of chaos and would be forced to restructure their debt, but within a year they would probably begin to grow quite rapidly, especially as the labor reforms implemented by Rajoy kicked in, and unemployment would drop sharply.

      Meanwhile Germany would suffer the double whammy of a collapse in demand and a financial crisis, and while the German banks would be bailed out, German workers would be both fired and taxed more heavily to pay for the bailout. You would think that the center-left parties in Germany would recognize the risk and treat the rebalancing of German demand with greater urgency. They should be making common cause with center-left parties in France, Spain and Italy to reduce deficit-country debt by partial forgiveness and, to the extent that there are clear infrastructure needs in peripheral Europe, to direct funding in that direction. Had the US in the late 1920s partially forgiven European debt (which would have probably cost a lot less than the defaults in the 1930s), England might have had more breathing space in which to adjust its vastly overvalued (relative to the USD) currency without resorting in 1930-1 to devaluation and tariffs (after which the British economy recovered fairly quickly, if I remember well), other European countries, and Germany especially, wouldn’t have had to devalue their ways into running the surpluses they needed to service the debt, and while the US would have still had to pay for the speculative excesses of the stock market, the liquidity impact of the debt write-offs would have probably resulted in less speculative excess.
      The official American attitude then, reflecting the desire of American banks to get full repayment in overvalued currency units, was as idiotic as the official German attitude today, which is still aimed at protecting the banks from having to recognize reality. As far as the Americans were concerned, the huge imbalances of the 1920s simply showed that Americans worked harder and saved more than the shiftless Germans and other Europeans, and had nothing to do with the currency misalignments created by the war.
      Sounds familiar, right?

      • You wrote: “Of course in those cases where the deficit countries are right, but the surplus countries refuse to cooperate, the tendency is for trade tensions to rise, and if they result in trade intervention, the resulting reversal of the imbalances almost always leads to rising GDP growth and declining unemployment in the deficit country and the opposite in the surplus country.” That is interesting because if you take the relationship between the U.S. and China from around 2000 to date, you would think that the U.S., as the deficit country, would intervene in trade by taxing Chinese purchases of treasuries or raise tariffs on imports from China or something, thus raising GDP growth and employment in the U.S., at the expense of China, but because of free market, free trade orthodoxy followed by both political parties in the U.S., that doesn’t happen, and since China does not adjust its trade policies, the U.S. continues to suffer a strong drag on GDP growth and employment as a result. That always baffles me.

  20. indebted southern european countries cannot successfully exit the Euro anyway. If a country like spain exit the euro and revert to its national currency, its currency will hyperinflate, and most spanish will choose to hold euro even if the spanish government try to force everyone to use the new national currency.

    • People keep saying this as if it were obviously true, but of course it depends fully on how Spain leaves the euro. If a centrist and pro-European leadership in Madrid were to negotiate partial debt forgiveness and a temporary euro exit with a commitment to return within, say, five years at an implicit 20% discount, and to offer in exchange a program of further labor reforms, substantial fiscal and financial sector centralization within Europe, and if this agreement received credible German support, unemployment would drop almost immediately and Europe would finally have the institutional changes that permit Spain to participate in a European currency union that can actually work. Madrid (and other capitals) would accept the necessary loss of power needed to make the euro work, in other words, only if it were bribed into accepting the loss of power with debt forgiveness and a less brutally painful real adjustment of the currency.

      As it is Europe is so obviously not an optimal currency zone because it has up to 28 fiscal centers (not to mention as many banking systems) and except for in the smallest countries no one wants to give up taxing authority and the ability to determine fiscal spending. The only way to make Europe functional as a currency zone is to use the crisis to force the kinds of institutional changes that would otherwise be vetoed by national governments. The only inducement for national governments to accept these changes, all of which will inevitably undermine local power in favor of Berlin or Brussels, is a “bribe” that reduces debt and unemployment enough to force voters to overcome the resistance of national governments. Why else would Madrid, Rome, Paris, etc. ever agree otherwise to the diminution of fiscal power that is a necessary condition for the euro to survive? It might not be obvious, of course, that Germany will be willing to foot the bill (it is ultimately their banks who would grant the debt forgiveness, after all), but it is hard to imagine a currency union being run out of 28 fiscal caitals.

      Spaniards are told repeatedly that they must choose from among only two options:
      a) Stay in the euro and suffer a little more pain for a few more years (although “a few more years” has been seven years and counting), or
      b) Leave the euro and collapse into chaos.

      But it is at least as likely that the real choice is from among other very different pairs of options. If Germany can be induced to pay the “bribes” needed to co-opt national governments, the pair of options might be:
      a) Renegotiate the euro with partial debt forgiveness in exchange for the institutional reforms needed to keep Europe alive, or
      b) Wait for several years more of stagnant growth, high unemployment, and a rising debt burden until furious voters choose anti-foreign extremists as their leaders and so abandon the euro in a disorderly way, perhaps never to return.

      If Germany cannot be induced to pay, the pair of options might be:
      a) Leave the euro immediately, renegotiate the debt, and accept a year of chaos, after which Rajoy’s reforms, combined with written down debt and a competitive currency cause growth to surge and unemployment to drop sharply.
      b) Wait for several years more of stagnant growth, high unemployment, and a rising debt burden until furious voters choose anti-foreign extremists as leaders and they drive a much weaker Spain into abandoning the euro in a disorderly way.

      Both the centrist parties and the extremist parties in Madrid insist that the first pair of options is the only pair from which Spain can choose, the centrists because they are paralyzed into inactivity, and the extreme nationalists because they oppose the euro and think time is on their side (and it probably is). However it may well be that, just as we have seen throughout history under similar conditions, Spain actually must choose from the second or third pair of options. Germany’s willingness to pay, which is a requirement for the second pair of options, might be encouraged by the realization that if Spain faces the third pair of options, whether it leaves the euro sooner or later Germany would be hit by the double whammy of a collapse in demand and a financial crisis.

      Perhaps Spain’s options really are limited to remaining in the euro or collapsing in hyperinflation, but this is not what the historical precedents suggest (Argentina after 2001, for example). Its options may actually be very different, and that possibility should at least be open to debate. The extremists should not be given control of the debate, but they will control the debate as long as the centrist parties insist that they will never consider anything other than full adherence to the euro and full debt repayment, whatever the cost.

  21. Michael,

    You mention that the dollar will remain the primary reserve currency unless and until “..Americans decide that they are no longer willing to enjoy the “exorbitant privilege”, and Washington imposes restrictions on foreign purchases of US dollar assets..”

    This is exactly what Jared Bernstein proposed in a recent NY Times op-ed piece, “Dethrone King Dollar.”


    What would be the effect on China’s rebalancing if such a move caught Beijing off guard?

    • Yes I read the NYT piece and it refers to a very good article by Austin that I myself have mentioned before. I think in the short run it would be very difficult for much of the developing world but in the longer run it would lead (I hope) to a change in the rules, with something more akin to Keynes’ proposal at Bretton Woods, that would lead to a more sustainable trading order. The point is that I do not think the current system can continue, and it forced brea up would be truly damaging for everyone.

      • Keynes’s Bancor proposal is a huge task which requires the exact reconciliation and matching of present and discounted future real economic flows with financial flows and balance sheet and off-balance sheet positions of the financial sector, on a country-by-country and cross-border basis, including all tax heaven black holes.

        Worth an article in itself – if you have the interest and find the time – to summarize how this fascinating project might operate today and how it might help to achieve “The Great Rebalancing”.

        Thank you.

  22. Michael, in response to Question 1. above you write “The point is that you cannot really write about the origins of the Opium War without including the very important role of the Latin American wars of independence, and yet few historians do. These kinds of sometimes-surprising global links are even more important today. Brazil and Australia had booming economies during this century, for example, but how many people know the role of artificially low Chinese interest rates in creating the boom? It is not a coincidence that the boom in both countries has ended just as the amount of interest rate repression in China has almost disappeared. It had to happen.”

    Do the last two sentences imply that China has ended, or severely dialed back its financial repression? If so, I have not heard this elsewhere, which seems strange because this strikes me as a big deal. Could you perhaps clarify the current status of financial repression in China? Thank you.

    • The extent of financial repression is broadly equal to the gap between nominal GDP (NGDP) growth rates and the nominal lending rate for high quality borrowers. While the latter has increased only a little in the past three years (from 7% to 7.5%, roughly), NGDP growth rates were 18-21% for most of this century, but in the past three years have dropped to around 9%.

      You are right, John, to think this is a big deal, but it took many years before most economists covering China understood why financial repression was key to understanding both China’s turbo-charged growth and its soaring imbalances, and it may take time before they realize just how important is this collapse in the financial repression tax, especially, not to be too cynical, when many sell-side economists among those who predicted GDP growth rates of 7.5% have been urgently warning the government that it absolutely must reduce interest rates to keep growth from dropping below 7.5% this year.

      The PBoC is reluctant to drop rates, of course, because this can only keep growth at 7.5% if it causes the debt burden to worsen substantially. But I do think we are going to see more bouts of panic. Remember how pro-cyclical this whole thing is. High NGDP growth rates make it profitable to borrow at 7% and invest in real estate and other projects, and all this investment causes real estate prices and NGDP growth to rise even further, making it even more profitable to borrow at 7%, and so on until debt becomes a constraint.

      But now we are in the reverse process. Declining NGDP growth rates reduce the incentive to borrow and spend (unless you are insolvent and need to gamble your way out of insolvency), and this reduces NGDP growth further, and so on, until unemployment rises and Beijing is forced to choose between more unemployment and the risk of hitting debt capacity constraints.

      Unfortunately, they have to accept this pro-cyclical process if they want to squeeze out bad lending. If the PBoC can hold the line on interest rates for another year or so, you must believe that NGDP growth will continue to drop if you believe growth has been propped up by even faster credit growth. We’ll just have to wait and see, but for now I continue to be pretty confident that growth rates will drop by one percentage point or more every year going forward. By 2016 the PBoC will probably be able to lower interest rates in line with NGDP growth without worsening the debt burden, but until then I think they face the very difficult tradeoff.

  23. Just two more questions and obviously only answer if you have the time. You were gracious enough to thoroughly answer my first question. I also state this with the caveat that I am no expert in these matters. Anyway, I wonder how the reduction in financial repression in China might affect asset prices outside of China. On one hand, I can see how a reduction in real returns to Chinese equity investors (i.e., a reduction in the spread between NGDP and nominal borrowing rates) may cause investors in Chinese to reach for yield by deploying their investment dollars outside of China, and that such marginal demand for, say, Australian real estate could cause the prices of Australian real estate to increase. I can also imagine the opposite effect, where declining NGDP growth in China may have some sort of mild negative wealth effect inside of China, which could actually decrease the demand by Chinese investors for Australian real estate, which would presumably cause the prices of Australian real estate to decline, or increase less than they would have otherwise. What do you think the net effect on non Chinese asset prices might be, and could such an effect be significant?

    I also imagine that this effective increase in real Chinese interest rates (with “real” not being defined in the customary nominal interest rate less consumer good inflation framework, but in terms of nominal interest rates less asset price inflation) could effect both nominal and real interest rates in the rest of the world. I also wonder how significant those impacts might be.

    Implicit in my questions are an assumption of a relatively orderly NGDP and debt adjustment in China.

  24. ^Michael Pettis WROTE: “Take the Opium War in China. The standard narrative is quite straightforward. For centuries, we are told….”

    Given that you live in China and are familiar with Chinese history, I was wondering about this curious point:

    If the Chinese were importing large quantities of Opium and, we are told (?), had a severe problem with an epidemic of drug addiction, why is it that the Indians, who were exporting those large quantities of Opium have no record of any serious drug-addiction epidemic in their country at that time?

    I mean, if we look at Afghanistan today, which exports large quantities of Heroin to Europe, we can see that the Europeans, as importers, do have a heroin-addiction epidemic, but the Afghans, as exporters, ALSO have an heroin-addiction epidemic.

    So why does this “bilateral addiction” phenomenon not show up in the India-China opium trade in the times of the British Empire?

    PS: Forgive me if this sounds like a digression from the blog-topic of international trade, but it does seem a curious point of history.

  25. Loved that you mentioned Kindleberger’s book, I was wondering have you come across anything similar for China/Asia?

  26. Dear Mr Pettis,

    Your framework of analysing trade and capital flows (and the credit systems underpinning them) as the linkages of an unbalanced global edifice is very fruitful. The historical and geographical perspectives you provide in the interview and in your responses to comments make it even more interesting.

    The key sentence for me is this one: “In a globalised world, without a globally coordinated no-cheating boost in spending, beggar-they-neighbor policies may be systematically crazy but they are individually rational.” We seem to have fallen precisely into this trap.

    Yet, your recommendations remain limited to domestic policies (government-funded infrastructure program and redistribution to reverse income inequality in the US ; increasing labor share in Germany and China) that are difficult to take precisely because they expose the country taking them to the danger of doing it alone and being undercut by others. You make that point clearly when you say that rising demand is “something Berlin doesn’t want to do because it would cause either their debt to grow or their export competitiveness to be undermined.” You could have said the same with the US where the benefits of the envisaged extra spending will leak abroad under current conditions, leaving the extra debt behind. The other solution you suggest for the US – trade tariffs – is not exactly a “concerted and coordinated action” but more a unilateral action that might be taken once it’s clear that no globally coordinated action is coming. As for China, for all the talks about rebalancing, when it came to it in 2009, China found it much easier to lean towards boosting investment dramatically more by expanding credit, thereby adding financial imbalances on top of the existing economic imbalances that have largely remained.

    In my opinion, this “systematically crazy but individually rational” dilemma facing policymakers from all the largest economies is the real reason behind the apparent “political gridlock” and the ineffectiveness of the G20 beyond short term measures to backstop markets in the initial phase of the crisis. For a while, reassuring words and pledges of commitment have produced their placebo effects. But the realisation is mounting that they are not enough and that policymakers are actually paralysed. As Paul Volcker said recently, the creation of the G20 has been a political accomplishment but it means little without substantive agreement on what to do (http://www.brettonwoods.org/publication/remarks-by-paul-a-volcker-at-the-bretton-woods-committee-annual-meeting-2014 ). It is also becoming slightly embarrassing for central banks and international institutions (not to mention sell-side analysts) to continuously cut growth forecasts for 4 years in a row (and to continuously increase total-debt-to-GDP ratios, for the small minority who thinks that debt matters, that is) despite their large scale stimulative actions. In short, policymakers appear increasingly powerless and in some cases totally discredited. Meaning they are increasingly fragile. Meaning they will be increasingly challenged, both in frequency and intensity. This has already started.

    I believe your framework is the correct one to understand how and why we got there. It is really looking for the causes, by opposition to other explanations which are only dealing with the visible symptoms. It is fully compatible with observable facts and data, unlike most other explanations that are repeatedly contradicted by the facts (the BIS is now finally admitting in the paper provided above by Alex that existing macroeconomic models are worthless. No joke! This has been the case since the 1970’s already when the world trade and monetary / financial system changed but the models remained the same ; What’s taking these guys so long?). Your framework also lends itself beautifully to interpreting and learning the lessons from history. But it seems to me that this framework also has an operating value in inviting a set of solutions here and now that naturally follow from the diagnosis of how the imbalances originated in the first place. Yet, it seems that’s a line you don’t want to cross, even though it’s not a political line. Not even on a blog called “controversial truths”. That’s how i understood the remark above by Michael LeGrand. And that’s also the feeling i have when i read you. Only in the case of the Euro, you suggest a realignment of currencies in what ressembles a system of cooperatively managed exchange rates around a common unit of account so as to avoid the development of imbalances and so as to adequately share the costs and incentives of the adjustment in the case where prevention have failed and imbalances have developed too far. Isn’t the Euro a concentrated version of the imbalances that have developed globally?

    The modesty you display at the end of the article is entirely to your credit. Still, it would be very interesting if you could elaborate on the globally coordinated institutions and policies able, in your opinion, to break this paralysing policy dilemma. Simply observing that extremist political parties have thrived in the past in similar circumstances leading to protectionism or even revolutions or wars (not the currency sort, the military one) strikes me as a bit too fatalistic. It can of course quickly become realistic (it is already) but isn’t there something we could first do collectively to try to avoid this? After all, who better than a balance sheet guy to stop and reverse the global debt snowball?

    Thank you

  27. The claim that during the 50s Asia’s low savings rate was attributed to Confucianism, I would like to see it backed up with quotes.

    The passion for historical debate here, strikes me as strange. I hope everyone is aware that there actually exist genuine economic historians? As far as I know, no one here, including the Professor, is an economic historian so we risk being an echo chamber with little critical references, nor methodological know-how.

    Why do people repeat that China was a net exporter from time immemorial? You are aware that you are merely perpetuating a popular myth? Why do you suppose it invested so much into its silk industry by the time of the Tang? Oh yah, Silk imports were so fun!! Working hard to get sand from the Kangs in central asia and the barbarians in the South Sea. Yah, makes lots of sense. LOL.

    The only reason there is a historical debate here is because of people’s identities. The trend is towards Europhobia from a Sinophilic or Indophilic perspective. The agenda is to believe in a China which was the center of the economic world, and the Eurpeans were a mere periphery. This is a natiolaist agenda, not based on anything in economics but the most superficial pop science, and hidding identity issue in economic statistists is a disservice to economics. Of course everyone has identity driven agendas, but there are differences in the quality of the information and methodology. China has a long way to go when it comes to historical accuracy due to censorship, and India lacks the investment in its humanities, so both should be a damper on anyone who gets carried away with the Sino-centric or Indo-centric narrative. If you’re going to be Sinophlic, or Indophilic as a result of Europhobia, then at least have the courage to admit that as of now, European historiography is on a level significantly higher than anything coming out of CHina, or written by Sinophilic academics in the West. Afterwards let’s talk economic statistics if you can get them and rely on them. This said, Europe and America have a great track record when it comes to national statistics, but actual international statistics, are abysmal for all concerned. Just try looking up a history of the shareholders of the East INdia Company in London. There are such obvious gaping holes you wont believe it. Europe can be trusted on European history, and European authors are the most reliable in international economic history, but overall, international economic history is something largely underappreciated by nations the world over and hence receives little attention. China on the other hand is not to be reliaed on even nationally, while in India, you have to know who you are reading, before you take it for Holy Writ.

    There is an entire field of economics dedicated to international economic history, vs national. The dominant product in the American market is national, often conflated nationally with the international, but this in no way invalidates the enormous amount of work done by many a great academics in the international field. Should there be a greater emphasis on international economics both historical and immediate in America? Why? Is there a real emphasis in any other country? In any other national academic tradition? People work with data that are easiest available. International stats are not standardised making it analytically more complicated than studing national economics. International institions do their best to standardise information but they are decades behind national statistical efforts. The stats are just not standardised and one ends up comparing apples to oranges on issues where the assumption was made with prunes.

    Take two very important international markets – currency, and labour. the Professor often talks about the former, but never the latter, yet a good interview with James Goldsmith with Charlie Rose, suggsets that the latter was as essential to internationla economics as global capital flows. Instead of debating culture and india and china, let’s talk social standards, legal norms, and credit institions. Let’s apply the same criteria to our discussion of Spain and Germany, as practice. Ah, somehow international labour norms do not attract anyone’s attention in the same manner as Marvel Comic “China is bEtter!” or “India is biggest” or “Europe was dominant”. Labour norms are incredibly complicated, aren’t they? They are part of an overall institional framework, right?

    The dogma that one can stimulate demand, that Germany, and China have some esoteric responsibility to do so, should be perhaps debated amongst many things from the institional perspetive. What do you propose to stimulate? Is demand some kind of entity that can be electroshocked into action?

    Methodologically speaking, the Professor often resorts to discussions of accounting identities. Trouble with this, is that economics is about more than filling a leger. It’s not plausible in all circumstances to reduce economcis to leger-nomics. The entity of savings, and investment, is in fact quite distinct. The alchemy of transmutation, passes through institutinos, and national habits.

    The currency debate is where I most disagree with the Professor. Currencies are not merely the work of account or trade balances nor of monetary policy. The role of the FX market, and fiscal policies, are equally important. Capex and money velocity are also important elements.

    It’s somewhat reified to imagine that had Spain not adopted the Euro, it would not have found itself in the same predicament as today. Nothing suggests that a mechanism by which automatic depreciation would have occured, would have functioned in the case of its bilateral trade with Germany. By definition, labour was less expensive in Spain than in GErmany and any investmetns would have been inflationary, unless accompanied by actual productivity growth in the Spanish economy. It’s no use to “monetise” the issue when its one of productivity.

    Importantly, Spain was a peripheric node of Western Euroeapn industry, until the unificaiton of Germany, and the opening up of Eastern Europe expanded this periphery eastward. German capital gained not from an Ordoliberal agreement but from the integration of more productive supply chain running through the Vysegrad countries.

    Nor does it make sense to discuss Spain’s pre-crisis perfomrance as anything but speculative. Spain’s economy wasn’t actually growing when the speculative flows are discounted. It had been deindustrializing from the late 90s, in the same manner as the American economy.

    I dont see what the purpose is of arguing who is to blame, a technocratic sterilisation campaign by Beijing, or America’s insatiable appetite for consumption, when arguing either of these positions is tantamount to merely revealing one’s own analytical prejudices. The companies which grew China’s econmoy in the 90s, were all Western. The Capital was Asian only where Japan was concerned. Multi-nationals wouldn’t have stayd in China if it hadn’t sterilised dollars, and customers in America would not have Walmart to shop in, nor inflated stock and estate valuations linked to sterilisation cycling back into American markets. It was and remains a daisy chain bringing us back to a simple question, how do you roll over bad loans in the global economy without anyone taking a haircut?

    Impossible. Somewhere someone has to take a haircut and no, its not going to be an elite group of rich men who everyone is complacent to scapegoat. It will be a general population, somewhere somehow.

    The idea that demand can be stimulated, is too farsical to merit comment.

    • I think it would be relatively easy to un-perplex yourself, partly by allowing facts and logic to overcome ideology and partly by reading what Pettis actually says. How do you define a “genuine economic historian”? According to an awful lot of people, including prominent economists and at least one central bank governor, Pettis is one of the best financial historians in the world. His book Volatility Machine is a book of financial history structured around what I think is probably the best analysis of financial crises in modern history. At least that is what Dani Rodrik says, and I attended a seminar of the Levy Institute in which the head of the institute cited it as the best book ever written on the history and causes of financial crises in developing countries. In fact every one of his books and many of his articles draw immensely on economic and financial history.

    • If you don’t enjoy being perplexed you might want to read the article before you comment, no?
      You question “Why do people repeat that China was a net exporter from time immemorial? You are aware that you are merely perpetuating a popular myth?” Which people? Every time Pettis addresses China’s history of perpetual trade surpluses it is to point out why this is completely untrue, and unlike you he doesn’t simply assert it because he is pissed off at China. He actually explains why this myth exists and why it is only a myth.
      You ask “Should there be a greater emphasis on international economics both historical and immediate in America? Why? Is there a real emphasis in any other country? In any other national academic tradition?” What is your argument? That Americans like Pettis should not try to understand the way events in the US can be driven by external factors, because people from other countries don’t do it. So if foreigners are going to be stupid then Americans must retaliate with equally stupidity? I suppose there is no point in telling you about foreigners like Fernand Braudel or Karl Polanyi or Theotonio dos Santos?
      You say: “The claim that during the 50s Asia’s low savings rate was attributed to Confucianism, I would like to see it backed up with quotes.” Does that mean that you have actually read his work never seen it attributed? So you didn’t see the references in the Great Rebalancing, with quotes, of the centuries-old legalist tradition in China that criticizes Confucians for, among many other things, their lack of thrift? Nor even the wonderful quote by Lee Kuan Yew where he justifies a certain tax on the grounds that the Chinese traditionally do not save?

    • I think Pettis is a little too generous sometimes in allowing totally free discussion on this site because too many times someone jumps in yelling about things that with very little homework would have been shown to be wrong. Perplexed Reader complains about the lack of citations in a specific article only because he hasn’t checked to see if there have been references. Then he makes a series of statements (“The idea that demand can be stimulated, is too farsical to merit comment.” “The companies which grew China’s econmoy in the 90s, were all Western.” Many more) that are completely unsupported by citations or evidence (and wrong). He makes other statements (“Take two very important international markets – currency, and labour. the Professor often talks about the former, but never the latter”) that are just silly. The professor makes the decline of household income relative to the goods and services produced by households central to his analysis, and the relationship between wages and productivity one of the main contributors to that decline. I don’t think it is even possible in that case for him not to talk about labor. This is is a very, very long comment, and very confused thinking, but that’s fine because we all want to learn, but because many of us do try to follow the discussion in the comments, out of courtesy he should have excised material that can be shown to be wrong just by reading carefully, or by reading a few other entries.

    • PerplexedReader says “Take two very important international markets – currency, and labour. the Professor often talks about the former, but never the latter”
      You’re joking right? I think everyone who writes about the Chinese economy nowadays automatically assumes the role of currency, labor and financial repression, often without even realizing that the framework of his discussion was set by Pettis.

    • You are right about the very unequal availability and quality of data. Take debt for instance. This is one of the most important global macroeconomic issue at the moment. Yet, it is really not followed consistently anywhere and the data is very hard to get by. In most cases, public sector debt is reasonably well tracked and this is the debt-to-GDP ratio that is often referred to. But private debt, both households and corporations? Financial debt, and the extent to which it is double leverage rather than double counting? Very hard to get for many countries.

      The country with the most comprehensive data is the US which provides a clear breakdown of all debt owed by the Federal Government, State and Local Governments, Households, Non-Financial Businesses and the Financial Sector in the quarterly released Financial Accounts of the United States. The fact that this data was available all along and that nobody saw anything coming in 2008 (especially those who didn’t want to see) shows that the availability of data is a necessary but insufficient condition.

      But, even here, in non authoritarian regimes, the temptation to re-write history to align it to the party line is impossible to resist. Last Thursday, when the Q2 2014 Financial Accounts of the US was released and when all the attention was focused on whether the FOMC statement would still contain the words “monetary policy is expected to remain very accommodative for an extended period time”, the Fed quietly erased $2.4Tr of debt from the recent official financial history of the US. The revisions go back to 1995 but become material from 2002 which is when the debt build up leading to 2008 really started. No coincidence there. Over time, the revisions become proportionally more important, the Fed effectively erasing debt from official records at an increasingly faster pace. This is due to a “change in statistical methodology”. Of course. Combined with the change in methodology that boosted GDP by $500bn some quarters ago, the US ministry of economic truth has effectively erased the most embarrassing traces of the great debt build-up that started 14 years ago. That the US if officially stabilizing relative debt-to-GDP thanks to fictional accounting right at the time when it is experiencing yet another credit-fueled speculative frenzy would be amusing if we didn’t know what poor economic, social and financial outcomes this situation leads to.

      The Fed practice of “double speak” was already well known. For instance: “QE is for main street”. But now they also “re-write history”. They may not have studied Minsky in any great details but George Orwell clearly has no secret for them.

      Everybody can double check what i’m saying by going on the Fed website and download various Financial Accounts reports at various dates and compare the data. Vinezi perhaps?

      • Of debt, of course, you mean projections, and I suspect, you would be speaking of Treasury, rather than FED, no, please point to sources.

        • No, i don’t of course mean projections. I mean the counting of the total stock of outstanding debt now and in the past.

          No, you suspect wrongly, i’m not speaking of Treasury. I’m speaking of all debt owed by all types of agents (households, non-financial businesses, public sector, financials). As we have seen in 2008 and as we discuss frequently on this forum, there is a tendency to mutualise or socialise private debt once its performance becomes questionable. It follows that what matters is the total amount of debt obligations from all agents, not only public debt. For many countries, this information – total debt – is very hard to get. Compared to statistics on the P&L (Gross Domestic Product), statistics on the Balance Sheet (Gross Domestic Balance Sheet) are relatively scarce.

          The source is clearly cited for the US: it is the Financial Accounts of the United States (previously Flow of Funds).

          It isn’t clear to me what exactly is your point.

          Please, make the effort of articulating your point so that, at a minimum, it is understandable and, ideally, it adds something to the discussion.

          Thank you.

    • PerplexedReader is making another important point that is not always getting the emphasis it deserves. FX reserves (say China investments in US Treasury bonds) are effectively collateral for the capital US companies have invested in China in the form of FDI. It is not very difficult to imagine, for instance, that in case of serious conflicts between the US and China, we can quickly go to the stage of sanctions. In such a scenario, China could consider nationalizing the property of US companies under its jurisdiction and the US could consider freezing Chinese assets under its jurisdiction, may be repudiating the debt it owes to China.

      This geopolitical consideration implies that a developing country desirous to import FDI de facto has to offset private inflows of capital with officials outflows in the form of accumulation of FX reserves. To the extent that such outflows keep its currency competitive, the country in question doesn’t see this as a big inconvenient at its individual level (might in fact see it as an advantage) but of course if it implies that this developing country has to run a current account surplus it could be a source of imbalances. In the discussion with Vinezi on India adopting the same economic strategy as China (see “What does a good Chinese adjustment look like”), it was one of the reasons i though India would have to run a current account surplus, thereby exacerbating current imbalances and complicating the much needed “great rebalancing”.

      • I am not sure the USG “sold” USG bonds for that reason, DVD. In fact the USG has been trying to discourage the purchase by China and others of USG bonds. That is what it means to revalue the currency.

        • No, of course, the US Government is not selling bonds for that reason. It is selling bonds because it has a financing gap to cover. The only decision the US Government can take is whether to cover this financing gap by increasing taxes, reducing expenditures or by issuing debt. When the decision is taken to cover the financing gap by issuing debt securities, then so it does, issuing bonds to the primary dealers. Who, then, buys the bonds from the primary dealers is not a decision the US Treasury is in a position to make. Bonds have to be sold to cover the financing gap and so someone, somewhere has to buy these bonds at a price. If it is the PBoC which has the most interest at a given price / yield, then this is what it is. This is the “exorbitant privilege” vs. “exorbitant burden” debate: either the US Government is happy that many foreign powers buy its debt because the $ is the world reserve currency and this results in higher debt capacity / lower interest rates for the US or the US Government is not happy about that because it condemns the US to permanent current account deficits and so the US Government restricts foreign purchases of its debt which to say that its debt capacity is reduced / interest rates are higher. Whether it decides to keep the “exorbitant privilege” or to ends the “exorbitant burden”. But the US Government can’t have it both ways. I agree with you that this choice is not a real one and that it must – among other things – end the “exorbitant burden” to avoid sinking into deep level of debt.

          What i’m only saying is that, whether the FX reserves vs. FDI is an implicit rather than explicit quid pro quo, or even if it is a totally unwanted consequence of economic and trade policy decided and implemented by foreign powers, things seem to happen as if FX reserves act as de facto collateral for FDI, even though these flows go through the balance sheet of different entities.

          In fact, the geopolitical dimension of FX reserves and FDI is only likely to become relevant at a much much later stage of the game when, after years and decades of accumulated imbalances, trade and / or geopolitical tensions finally begin to rise. We see this clearly with Russia at the moment. Several Western firms – for instance in the energy sector – fear for their property rights in Russia while Russia is moving to rebalance its FX reserves portfolio away from US Treasury bonds into bonds issued by other BRICS countries. Or perhaps Russia is simply selling US bonds to buy Russian bonds to support the Ruble and try to prevent a too large capital drain. In any case, the geopolitical nature of FDI capital and FX reserves is plainly visible here. It doesn’t require a huge stretch of the imagination to see that a similar situation could develop between the US and China.

          It is one possible interpretation of current events that we are now moving towards that stage of the game where trade and geopolitical tensions are rising and that’s why i thought it was a point that PerplexedReader made that was worth emphasizing.

          Hopefully, it will not be the scenario that materialize. But one has some reasons to be … well, perplexed.

          • Financing gap, DVD, of course, if you pay no attention to the simplistic beauty of Michael’s models, at least, in the humility of his presentation, the way he structures a series of accounting identities, then, please tell me why, we who do and have would want to read, what you state. Of course, Michael, has shown, over and over how what you assume, perhaps ideologically, is neither the case, or leading to the results you expect. So perhaps, you should read over his posts, to get a clearer idea of what we have actually been discussing here.

          • Csteven,

            I have no opinion on why would you want to read what i state. Please do as you like. If you are exclusively interested in Michael Pettis’ thinking (which is indeed very valuable), you might find it a better use of your time to only read his original articles and skip entirely the comments section. But again, it’s your decision, i’m totally indifferent.

            But not only you read me, you also responded. Your response is not clear to me. What exactly is your point? Once this is clarified, i’m happy to discuss with an open mind.

            In the meantime, i don’t assume anything, not ideologically or otherwise. I simply read the news which say on a daily basis now that Russia is considering seizing foreign companies assets in response to sanctions while selling US bonds it holds in FX reserves. This suggests to me that FX reserves can be seen as de facto collateral for FDI in case of trade and / or geopolitical tensions. It is not an assumption, it is an observation. To be more precise, it is an interpretation of an observation. Please note that, in making this interpretation, i don’t lean ideologically towards any party. You are of course welcome to disagree with that interpretation. I understand that, as a matter of trade policy, a country might not like to see its currency being accumulated by foreign powers. But if this same country has a financing need to cover, has itself pushed to liberalize and deregulate capital markets and finds some advantages in having its domestic currency also the international currency, then this country has no real say in who buys its debt. Again, you are welcome to have a different view, all you need to do is to express it. Which is why i ask again: what exactly is your point?

            Thank you.

          • DvD

            1998 on track to retire the Federal Debt
            Markets, where is global capital going to go in the eventuality of a global crisis

            Has Greenspan lost the ability to set interest rates.
            Great spike (over the decade) in all capital movements (FDI, Portfolio Flows, Cross-Border Loans, Development Aid, Remittances, Trade, FOREX trading, BoP components)

            And this is a financing gap, that is the ideological claptrap that I mentioned.

            2007-2008 (Great heights to all these things mentioned
            And Ka-Boom
            thereafter is Greedy banksters on Wall Street.
            Not all of the very many participants in the things just mentioned.

            That is the ideological claptrap, again. But, merely a financing gap,

            Future, some peeps here and then , on the more obtuse narrowly focused venues, about investors will eventually demand higher interests, i guess because of gaps, but FED and holdings, and Public Trusts and Holdings, and ability to use them, buying, selling, converting interest payments back to FED to new bonds at different maturities, etc, a tool (to counter the supposed “financing gap, or because such has been shown not to exist)


            Supercycle story, and vast improvements in the resource dependent Russian economy, vis a vis, wage growth, consumption, and similar, but not diversification, inevitably, no improvement in the long-term position of the Russian economy. Inevitably more resources than they know what to do with, hope to sell more (emerging markets), with regular customers (EU), shrinking slightly in their access (due to economic lethargy and some political calculations).

            Russia, weakened considerably, great global growth in 2000’s, situation improved, since Putin merely blocking and hindering as an international appraoch to reverse notions of its weakening. Attempts to reverse decline, to set forth on a neo-imperial revitalization, global story, terribly and irretrievably infused with the poor economic considerations of what is and has been occuring globally, increasing the image based notions of what is happening in Russia. Russia pushing forward with its neo-imperial endeavor, have you read Dugin, the modern Russian Rasputin, a complete nutbag.

            So Crimea, and Sanctions, and continuing to hype the rise of the Rest and difficulties, less access to finance, 420 billion in reserves, over 700 billion in loans, less access to capital for investments, capital flights, etc….

            So foreign assets for whatever.

            Desperate actions for a leader who had not, has not been making any choices that are actually in the long term interest of the Russian people. Has been using aging tools to merely project images, as the structural strengthes are weakened, if some among his people have been posistively impacted by growth dynamics of a previous period, that we are not to see soon again (the very high global growth rates of the 2000’s), where resource prices will continue to fall.

            So not sure that any precedents are being sent, but simplistically, yes, your assertion of seizing foreign assets is always a risk in the choice to FDI. Such would inevitably occur in certain scenarios.

          • Csteven,

            May be it’s my English or may be it’s the way you write but it is still not clear to me what you are trying to say in relation to my comment that FX reserves can be seen as collateral for FDI in a geopolitical sense.

            Do you want to try again or shall we leave it here?

      • Thank you DVD, I was starting to get the impression I left a comment on some groupie website of readers who never sat through Econ 101 and whose economic knowledge is circumscribed by the zerohedge blog. It takes a thin skin to construe anything I said as personal attacks on the professor, or his ideas. Rather , I was bringing up issues which I believe he systematically misses. It was striking to see upset comments, chastising me for mentioning labour and currency markets in a standard manner, i.e. in the FX and labour regulation sense. This is a red flag as to some people’s handle on economics.

        I think I raised a lot of questions that would be addressed by anyone sincerely invested in the subject matter, but to keep it simple for those who seem to have zero formal knowledge of economics, I would merely reiterate my desire to see some evidence that at some point someone somewhere had laid the blame for profligacy on Confucian values. Anyone familiar with normative confucianism knows that thrift is a fundamental virtue. It is rather obvious that references to Confucian culture do not happen outside of China except in Singapore, HK, and Taiwan, and among the Huayi. Or if you want me to put it more bluntly among the Jook-sing. There is no point in regionalising the term or applying it to China’s neighbours.

        If I would choose one of my many points, I am very curious as to the timing, and intensity of the critique of Chinese culture in which profligacy is linked to Confucianism.

        I’ll be very blunt, I partly disagree with the the professors treatmetn of culture. I’ll become a lot less sceptical once this point is answered sufficiently. There are very strong cultural proclivities towards savings and profligacy, and while they are not constant throughout a culture’s lifestory, nor necessarily attributable to an ideological framework such as “confucianism” or “colbertism” I think it reductionist to duck the question of household savings rates by talking up the nation’s saving’s rate. Of course we’ve all read the professor’s work for years now, in which he has done his best to discombobulate the two. This doesn’t absolve him of often confusing them himself. CHina’s household savings rate is by any measure one of the highest in the world. This is likely the result of secular treds, i.e. the one child policy. This in turn puts pressure ont he national savings rate. I dont think its possible to always assume that sterilisation is the only factor in China’s under-consumption…if under-consumption is what it trully is…

        • It is difficult for me, PerplexedReader, living in Beijing, to get access to the books and articles published in the 1970s and earlier that blamed Confucian values for East Asia’s poverty and seeming inability to develop, but it isn’t hard to get plenty of evidence of the huge reversal in attitudes that took place in the mid-1970s once economists and sociologists found themselves having to explain a very different set of issues, and resorting, as they always have, to the same set of cultural explanations. I went to college in the 1970s and grad school in the 1980s, and as someone who always studied developing countries, I remember both the texts that we read that explained why Latin American would be the first, and East Asia probably the last to region develop, and the lectures which were already then struggling to explain East Asian success. Perhaps the reason I noticed so strongly that these explanations relied on the same set of cultural values to explain opposite events is because of the way I grew up, which I discuss a little at the beginning of the interview.
          I have always found that people with similar backgrounds to mine, and there aren’t many but over the years, from school on, we do tend to bump into each other anyway, have always been the most resistant to cultural explanations of politics or economics. The real differences between the behaviors of people in different countries tend to be easier to explain as reflecting different levels of wealth and modernization than of different deep-culture backgrounds.
          In fact I think the mindset that overstates and overvalues the importance cultural differences as an explanation for behavioral differences is so contrary to experience that it tends to be held most strongly by those who have grown up in the most culturally homogenous of circumstances, so that superficial differences in behavior, manners, clothing, and so on can seem strikingly alien that only deep differences in culture seem likely as explanations. In fact it seems to me – and I know this takes a lot of the romance and mystery out of encountering strangers with strange cultural values – that wealth, education, and how urban and modern a life one lives (what Marx would have called the spread of bourgeois values) explain the “deepest” differences in behavior I notice from group to group (not from person to person, of course) when I travel.
          When I hear people discuss Confucian values, for example (frugality, obedience, respect for elders, concern for “face”, a very strong family orientation), I can’t help but think of the people I grew up with when I lived in the Peruvian Amazon, or in our fishing villages in southern Spain in the early 1960s, or at my uncle’s (small) estate not far from Safi, in southwestern Morocco. In fact you don’t even have to go that far to see the same values. Anyone reasonably well-read in 19th Century US or European history and literature will have noticed how often intellectuals and the rich (and the authoritarians, too) complained bitterly that we ourselves were in the process of losing these same values. This has been a European refrain since at least 16th century Italy. Poor, rural societies with limited outside contact tend to share values that Westerners living in East Asia, or indeed East Asians who have visited or live in the West, think of as “Confucian”, and as they urbanize and get rich, within a generation or two these values disappear and are replaced with what we mistakenly describe as “Western” values.
          So are high savings rates inherently Confucian? I would argue that they are not, nor are other cultural values, like the willingness to work hard, to which we have ascribed East Asia’s economic success during the past five decades. It is mainly our provincialism in overstating the importance of cultural factors that has allowed us to convince ourselves over the past fifty years that these cultural stereotypes are meaningful, in exactly the same way that we were able to use cultural stereotypes about Confucian values to explain the opposite set of circumstances I the pervious fifty years.
          The idea that Confucian values, far from encouraging growth, were the main reasons why China and East Asia seemed mired in poverty, long predates the glorification of Confucian values. The Japanese experience is perhaps the best single example. Today, while few people think of Japan as an important example of East Asia’s Confucian values (it has become “Western” through a process of tautology), and whereas twenty years ago Japan was the archetype of a successful Confucian society, until the 1960s the standard explanation of Japan’s extraordinary economic success was precisely the cultural agility that allowed the Japanese to shake of the shackles of Chinese influence and so escape the fate of the rest of Asian.
          Both Marx and Max Weber described Confucian values very specifically as being opposed to the values that permit rapid development and modernization (in Marx’s case, he rejected any substantial distinction between Confucian values and feudal values). Both were hugely influential among development economists at the time, and this was a period in which Mao himself, following the May Fourth tradition, was engaged in a struggle to extirpate Confucian values because, as was widely agreed, it was these values that had held back China’s development for so long. Lu Xun himself, one of my favorite 20th Century writers and one of the great intellectual leader that emerged from the May Fourth movement, was clear about the adverse impact of the Confucian social system.
          To see just how much we have reversed ourselves, an interesting piece called “Confusing Confucianism With Capitalism: Culture As Impediment And/Or Stimulus To Chinese Economic Development”, by Harriet T. Zurndorfer , list the many ways in which our views on the impact of Confucian values on Asian development have flipped so dramatically. This article is easy enough to google. So is an article by Eddie C.Y. Kuo, “Confucianism as political discourse in Singapore”, in which he argues that not only was there a huge reversal of the perception of Confucian values n development, but this reversal was driven mostly by foreign experts on Confucius. Because it was difficult to find Asian scholars who did not see Confucian values negatively, he writes, the Singapore government had to turn specifically to these foreign experts in order to build a concept of “Confucian values” that could be used to in the educational system to create a unifying concept of citizenry and, not incidentally, establish that Asians naturally prefer authoritarian governments to personal liberty.
          In John Wong’s “Promoting Confucianism for socioeconomic development”, also easy to find, Wong makes a similar argument (he says that Herman Kahn was the first, in 1979, to make a very strong case for the link between Confucian values and development), although he suggests that the strongest case you can make for Confucian values is that it is not an impediment to development. He notes that the opposite sides of the Confucian values argument committed the same sin: “early in this century, when China was poor and backwards, many scholars, from Max Weber to the young Chinese scholars involved in the May Fourth movement blamed Confucianism for having caused China’s backwardnesss, and their arguments were equally tautological in nature” (and I would argue that this has been true of nearly all cultural explanations).
          Chaebong Hahm and Wooyeal Paik in “Legalistic Confuciansim and economic development in East Asia” have a different take on the role of Confucian values in state-directed development. They argue that many of those cultural values that are now considered inherently Confucian and inherently modernizing, including the state’s encouragement and accumulation of savings to invest in strengthening the state, are not so much Confucian but rather an adaptation from China’s opposing “Legalist” tradition – which was generally critical of Confucian culture. It is from this tradition, by the way, that Arnold’s reference to the centuries-old tradition of criticizing Confucians as spendthrift and lazy comes. Arnold also mentions the Lee Kuan Yew quote in which he argues in favor of a tax to force up the savings rates in Singapore because, he says, the Chinese “spend freely and save less.”
          I could go on, and if I were in NY and had access to the Columbia University library, I am sure it would be easy to find far more direct evidence of what is a fairly straightforward argument: to assign credit for East Asia’s rapid growth in the past six decades to Confucian values, including a tendency towards high savings, is simply to reverse the argument made a few decades earlier, in which we assigned blame for East Asia’s poverty and stagnation to those same Confucian values. I don’t know if we can better describe this as orientalism or as tautological. But either way it is a fairly useless argument.
          Given how easy it is to the tremendous reversal in the way we have historically evaluate the role of culture in China’s growth – it is not at all a controversial claim, and in fact one of the few things foreign China experts agree on is that we have always seen in China whatever we want to see and have had a long history of reversing our verdicts –I wonder, PerplexedReader, why you are so certain I am wrong. It cannot be because you are familiar either with China’s recent economic history or with the long, centuries-old debate among China scholars the way in which over the centuries we constantly reverse our views on China.
          It would have helped if you had done more than make assertions but the only explanation I can think of is that you, like nearly everyone else who knows a little about China and the Chinese, have probably heard many, many times that frugality is, and has always been, one of the core Confucian values, and so you cannot believe that there ever was a time when Confucian values did not encourage high savings rates.
          Confucians have indeed stressed the virtue of frugality since the days of Confucius – in fact even earlier, because Confucius claimed his teachings were nothing more than the recovery of the old, virtuous ways. It is even part of our early 20th Century stereotype of the “Confucian gentleman”. Not even Max Weber, who thought Confucian values were inimical to growth, doubted the importance of frugality in Confucian culture.
          You do mention that Chinese household savings are currently on the high side, but I assume this can’t be the reason for your disagreement. First, China’s household savings rate is high but not extraordinarily high, and it comes nowhere close to explaining why China has the highest savings rate in the world. Second, if we want to explain China’s household savings rate there is absolutely no need to seek cultural explanations – rapid GDP growth, weak social safety nets, and extremely high house prices, all of which conditions characterize China today, tend to force up household savings. What is more, thanks to the one-child policy the country enjoyed an astonishing surge in the working share of total population. This started in the 1970s and will begin to reverse in a few years, and its extent is, I think, unprecedented in history. Current Chinese household savings rates really don’t need Confucian values to justify them.
          So assuming that you base your objection on the famed “frugality” that always seems to have been encouraged by the Sage and his followers, let me suggest at least three reasons why this isn’t a very good objection or counterargument. First, it is hard to find a single great philosophical tradition that does not claim frugality as a virtue. It is a core message of Christianity, for example, but even Max Weber was only able to argue that a limited number of Protestant sects, among the larger majority who also preached frugality, were culturally predisposed to savings and, not surprisingly I think, his arguments have not held up well at all.
          Second, one of the reasons frugality is so often stressed, as the Legalists point out, is that it always seemed a virtue far more preached than practiced in China, and if that is the case, to argue that the Confucian tendency to save helped foster East Asian growth doesn’t make sense. This is all the more obvious when you consider that there have been many periods in Chinese history during which savings rates were very low relative to other countries – relative to European savings rates during the 19th Century, for example — and without resorting to tautology it would be hard to argue that these periods occurred when China was somehow less “Confucian” than it is today.
          Third and most important is your confusion over frugality and high savings. They are not the same. The Confucian gentleman traditionally disdained menial work, just as he disdained more generally any work done primarily to earn money or favors. The work he was supposed to value was designed to cultivate virtue, taste, and scholarship. He also, ideally, of course, disdained expressions of wealth and the desire for lavish spending.
          But, aside from the fact that these virtues are still hard to disentangle from the virtues of pre-industrial European gentlemen, frugality only leads to high savings rates if it is accompanied by high income. Unless wealth were inherited or bestowed, Confucians didn’t really allow for the accumulation of savings. This refusal to work and accumulate wealth, and not the refusal to spend lavishly, is why I would guess there has been a long tradition among the anti-Confucian moralists (and among 20th Century Chinese intellectual and modernizers) of vilifying Confucian values as being bad for the state.
          Unless I have misunderstood your reasons, I will continue to argue that the claim that Confucian values explains China’s current high savings rate, and therefore its high growth rate, is as provincial as the opposite claim made several decades. By the way it is a little unfair to dismiss the comments of those who disagreed with you as mere “groupies”. I think they were absolutely right and I am pretty sure you haven’t refuted any of them. For example you said that all you wanted “is some evidence that at some point someone somewhere had laid the blame for profligacy on Confucian values.” Why doesn’t Arnold’s reference to my citing Mozi (who said that the Confucian “turns his back on what is basic by refusing to work, and contents himself with laziness and arrogance.”) not qualify as an answer?
          Obviously I can’t defend myself from your claim that no one on this site knows economic or financial history, as Jack Post does, but Arnold is right all three times where he disagrees with you, especially when you demand that I stop perpetuating the “China trade surplus” myth, which, honestly, is so dumb that I am not sure why he responded. I also don’t see what to object about D’s claim that you are wrong to say I never discuss labor. You clearly are wrong.
          And your statement that “The idea that demand can be stimulated, is too farsical to merit comment” is just silly and the sort of thing that counts as zinging debate on Yahoo, maybe. Forget about whether or not demand can indeed be stimulated (of course it can), but anyone who thinks that the question has been resolved so completely that it is not even worth discussing is about as credible as someone who thinks that Israel is so obviously the culprit behind 9/11 that any skepticism is a waste of time.
          I apologize to all my readers and “groupies” for this very long and quickly written comment (and for all the typos you will find), but once again I am stuck at my office late at night waiting for a phone call from LA (15 hour time difference), and what’s worse, my music club is closed on Monday so even that avenue of escape has been closed off. Because many people besides PerplexedReader have far more confidence than I do in the explanatory value of “culture” in understanding why we are where we are, I get his kind of objection often enough that this long comment will eventually become part of a more general piece on orientalism (especially the well-intentioned kind) and cultural determinism.

          • It’s because social scientists and economists have little ability to look at the world with a probabilistic mindset and/or they don’t understand the behavior of complex systems. Instead, they rely on bullshit narratives that fit the way they want the world to be.

            That being said, I do think culture matters, but I think it matters in a different way. For example, a society under (some versions of) Sharia law doesn’t allow banks to charge interest. Obviously, this is a cultural impact. Having a principle of clearing the debts at the turn of every king also has an obvious economic impact. So we can’t eliminate religion and culture from the topic completely, but human nature doesn’t really change.

          • let me quote you professor “and moralizing economists then had no trouble blaming Asia’s seemingly intractable poverty and low savings on Confucian values”

            This is where my problem started. As you yourself may note in your detailed response, this statement amounted to a bit of a stretch on your part. There is no point, whatsoever, where “low savings” were attributed by any professor whatsoever to, Confucian values. No point. No academic. No one. Confucinism and frugality, have been etched in everyone’s mindset, be they anti-Confucian or pro-Confucian. It is important to keep in mind that savings were not part of the developmental debate.

            While your international background is interesting, I am sorry to say that it cannot be an argument, becuase you must be aware that while your domain is a certain form of economics, i.e. general economics, we cannot easily confuse our personal experiences with stylised facts. The term “Desi” and ” Jook-sing” exist for a reason, would you like to make one up for Western Whiets who travel the world and assume their experience represents somethign more general? Just what an “international” background imparts to a person’s ideology, isn’t your field of expertise, nor mine, hence shouldn’t we be a bit more careful in assuming what it means? It is certainly not independent of the persons race, religion, social status, etc. Curiously, you must be aware that arguing “ad biographically” is itself a form of cultural determinism?

            You mention Marx and Weber. Neither are economists. Marx was a political economist, Weber a sociologist, hence your argument are of sociological determinism of a political economic nature. Max Weber, in his work on Confucianism and Taoism, is worth reading in its integrity. I invite everyone to to take a gander at it. You’ll see somethign startling, leave aside for a second what “values” mean, and you’ll quickly realise something quite astonishing. First Weber speaks of China. SO please, leave the Tigers out of it.Second, he explains why Capitalism did not develop in China, wheras in Europe it did. For those really interested, show me where Weber’s argument fails? Has China developed capitalism? Nope.

            Still leaving Weber’s cultural determinism aside, since even you professor, profess a certain cultural determinism when it comse to your own experience and that of others, i.e. a cultural determinism of social determinition, there is nothing in the social scienecs to indicaet that social determinisim has more traction than cultural or biological. Although the latter is not mainstream. This is an open ended question, and there is no need to be too dismissive of open ended questions.

            For our purpsoes, let’s recall that sociological analysis in the 19th century did not use the term “values” to explain anything. Weber didn’t use the term. He spoke of an “ethic”. Why do we use values anyway?

            Values are a neologism.”Asian values” are a neologism formed by a group of Desis and Jook-sings to identify the causes of their supposed superior success in America’s melting/boiling pot, both in looking back at their homeland’s ostensible rise in global economics. They are a form of identity based nationalist discourse to rationalise something which is perceived as positive by this group. What other groups mean when they say “Asian values” isn’t clear. “Asian” values are not “Confucian”. Let’s agree to limit Confucian to Chinese mainland. Japan is not a Confucian society. Never has been. Let’s stick to the term “Asian values” and not speak of 19th century White inetllectauls. Let’s stick to ourselves. Clearly “Asian values” represent nothing inherently confucian. THey are by all and any means the same values identitifed by American conservaties, Jewish or Christian, as being “Judeo-Christian” values. I.e. think Rick Santorum, or the average rabbi giving a drash. What’s being said by the users of the term “Asian values” is that economic growth is linked to some form of family focused hard-work ethic, which in their mind has nothing to do with national savings, but has a lot to do with microeconomic factors of personal savings, household savings, consumerism, future orientation, etc, etc dictated by the values of Indians and CHinese people. I honestly don’t know how much this is worth debating, since the most striking aspect of this neologism is how self-serving it is. At the level of Max Weber, please. At the level of chest-thumping Asians, or self-depricating Whites, it’s boring.

            let’s go back to economics, shall we?

            I cannot comment on your curriculum. If you studied developmetna economics, you would hvae been exposed to Baran, Sweney, eventually to Cardoso. The first two were marxists in that their reading of economists was political economic, and based on the rejection of Capitalism as a mode of production. I can’t recall Baran’s statements on “Confucianism”. What I do recall was his insistance on revolutionary attitudes. He attributed retardation in East Asia to a a failure to formultae a clear anti-capitalist path, whereas his hopes for Latin America lay in this regions more revolutionary attitude towards the global economic system. Its willingness to plan, to expropriate, nationalise, to mobilise resources, etc vs. Asias reluctance to let go of the forms of social habit that led to revolutionary fervor. While Marxists, they laid the foundation for developmental economics, focused on infrastructure, on progressive social forces, on socialist policy. This was Baran and Sweney at their best. Everyone will note, that while central to some schools of developmental economics, Barna and Sweney were not interseted in capitalism, and their crtiicism of China was not capitalist, but fromt the left.

            Developmental economics didn’t stop at the water’s edge, by the time anyone in economics was undergoing instruction at your age Professor, whether you got more of Sachs or Baran it depended on who tought your clases. The mainsteram “developmental” economist has been, since the mid-eighties, co-opted by a more monetarist school, linked to Bretton woods institutions. Part of their roots go back to Walt Rostow, who was a government hack, and whose links to US institutiosn revealed what was at stake – US developmental policy crafted in keeping with US foreign policy objectives. In Rostow you will find no criticsm of Confucians or Asians. The opposite. Their tendency towards a fascist, nationalist leaning seen as favorable to Capitalism. In this regard, it is the mainstrema school of “developmental economics” (in this case just how developmental it is, and how much focused on foreign aid, is a debate) which took a rather favorable view of traditional Chinese values, as a bulwark against socialism/communism, reminding us that one cannot simply speak of “experts” or “academics” in general, without keeping in mind whta they were after politically. Statemetns about how and why anyoen criticised China, (again, let’s stick to China, not some abstract notion of Asian or Confucian space which exists in the minds of Desis, Jook-sings, and Whites who parrot their attitudes) cannot be made as mere generalities, and specific texts need to be correectly contextualised. This is why it is very important to take Weber, and understand the gist of what he says, for hte period he says it. You can read him either as Sweney, and say “aha, this is why China can’t be socialist! becuase it couldn’t even be capitalist. It’s Feudal,” or you can take Rostow and read Weber as “Aha, this is why China can’t eb socialist, becaseu it is traditonalist-feudal, which means the next logical stage isn’t revolution, and Mao, but Chang-kai-Shek and capitalism…” You cartainly cannot simply yank Weber out of context, as I hope my discussion here convincingly argues.

            This brings us back to your curriculum and your statement. Again, not knowing who you studied with and what material you were presetned, the most likely content was based on the traditional notions of import/exports, monetary and fiscal stability, and only much later from a policy perspective an empahsis on savings, investment, and even later, perhaps only now (!) consumption. How much of this was culturally bisaed on laden with an Americano centric perspective? Considering the institutional linkages, nearly all of it. No one can miss the Structural Adjustment dogma of the IMF. We’re talking the 80s and 90s with recurring Latin American and Asian crises. Now if this is the case of your carriculum, I personally think you put way too much stake into your own memories of the cultrual arguments made int hsi milieux. First, its not a social science milieux, nor anthropological, so any cultural argument in this milieux is largely dross, i.e. some economist talking junk about a field that is not his domain. The Rostow-Washington Consensus school wanted nothing of culture. Scince and economicst were to be “objective”. Second, what the general biases of some group of economists going through this schooling may have been, is worthy of research more based on the lack of cultural depth and lack of sociological knowledge, than of any prescriptive value.

            Which leads to a basic conclusion, you have a domain bias against culture, but that does not mean that experst in area studies, in sociology, and foreign policy, get it wrong when they use culture as a refernce point in outreach, policy, and diplomacy. You dont want to deal with culture, because yes, in your discipline, its where you guys are not rigorous, are not relevant. Doesn’t say anything about culture as such. An example. I quote you:

            “Not even Max Weber, who thought Confucian values were inimical to growth, doubted the importance of frugality in Confucian culture.”

            Wrong. He said nothing of the sort. As an economist, you take license to miss the nuancse in sociological works, wheras for a good sociologist, the details matter. Weber did not speak abotu growth, he spoke of a specific notion of “capitalism” vs. feudalism. He spoke about why China did not trascend feaudalism. You cannot, almost in a jouranlist fashion, take such libety with what others say. Just as you as an economist, would take issue with many a detail coming from a non-economist but using economist terminology.

            You ask why doesn’t “Mozi” i..e Micius matter in his take on Confucius. Again, as an economist, you’re basically asking me why doesnt’ Krugman’s criticism of Rogoff matter. Well, because you’re picking antagonists. You’re not discussing Chinese culture, or Confucism. You’re picking one critical remark from a massive body of work.

            You say “By the way it is a little unfair to dismiss the comments of those who disagreed with you as mere “groupies”. I think they were absolutely right and I am pretty sure you haven’t refuted any of them.”

            Just as you Professor, I have serious time constraints. If my initial post was poorly written, and ruffled feathers, it was certainly not intended to do so. I just think you are not skeptical enough about your own conclusions and your own observations, because you seldom attract any sort of criticism. You’ve largely gotten people to comment, who are in no position to evaluate your work, and now your enjoying some sort of confirmation bias in that you understimate their own literacy. I have not at all taken you on in any form about your economicsts claims, becuase I respect your domain literacy and again, it’s easier to start with domains where you are not an expert, but I personally think you should be careful when you skip domains and assume you may be right, when in fact, you might be very wrong.

            So my issue with the comments was rather simple. There is no professional, academic link between those Asian Values we speak of today, and those linked to evaoluation of Chinese economic history of hte past, except where socialism/capitalism debate is concerned, and which has yet to be resolved. You, and anyone claiming some justificaqiton in the cultural debtae, based on historical revisionism, are not on solid ground. No one ever at any point accused Confucism of profligacy. The accusations were very very different, and contrary to dismissive attitudes, very very relevant.

            Your commentators jumped on me, literally, for having raised issues with your take on labour and currency. I am surprsied you dont understand what I was getting at! I mean seriously? When did you discuss the role of FX markets on currecny values? Of the FOREX exchanges? Where do you discuss how business cycle synchronisation can lead to de facto pegging? When did you talk about the role of currency regimes? On labour, whend did you discuss labour law, working hours, working contracts, and the application of this law? Where did you discuss the institutional mechanism of labour markets? The regulatory framework? Inflation benchmarking, contract modalities, and supply/demand equilibriums for various ISCO numbers?

            Come on! I read your work as religiously as everyone else. Just with a bit more skepticism.

            You have basically reduced your entire argument to accounting identities adn I think this is a big mistake.

            As per my cavalier statement about stimulating domain. Soooorry professor. I think that’s a cheap shot. Again, come on! You basically assume demand can be stimulated, dont you? You believe it. Fine, I admit that being cavalier about it, isn’t good, but then neither is being closed-minded about it. The idea that demand can be stimulated, sound as far fetched to me as the notion of supply side economics. The bottom line is, that people have disposasble and discretionary income. Let’s measure it for China. The bottom line is that Chiense households have nowhere to ivnest their money, they cannot do anything but buy property, becuase hello anyone – what are the instruments available to Xie and Ho, when they want to make a deposit in their local bank? Is there a market anywhere, other than the shadow one? Is there anything anywhere which isnt’ being set by the politburo magiclaly trying to manage the economy from one bubble to the next.

            Fine, you are a Keynesian, and you want to have your cake and eat it. You want to live with the ilusion that demand can be managed. Isn’t this what you hvae monetary policy for? Fiscal policy? Right?

            The only trouble is, that you forget all too quickly, that this goes through politics. That such decisinos are potliical. That outside of the economists wonderland, people do make decisions based on priorities and affinities which have absolutely nothign to do with economic tunnel vision in which the winner is the economist with one slit wrist and the other hand still moving, i.e. your one-handedness.

            It occured to me long ago, that if you were so right about your reading of the economy, the world would have been listening to you like they did with Roubini. Only trouble is, you keep on coming back to non-relevant policy debates which conveniently blame GErmany for europe’s trouble, and which create straw-men when it comes to China. You lose your relevance. You do it because you treat everything as an identity from accounting.

            Take synchronisation and currency regimes. The reason you are wrong about Spain and GErmany, is because you have not bothered to look at either factors. If you did, you’d know that whether or not you are in a monetary union doesn’t get you out of the monetary trilema. Linkage will get you in the same boat. Spain, with its abysmally poor productivity, wouldn’t have wone anything from having its own currency, other than a currency war.

            Your reading is never clear on this. Can you please outline how you can distinguish monetary policy aimed at devaluating current accounts from currency manipulation and currency war?

            . Is “Confucianism” repsonsible for China’s savings? Obviously not! There are no Chinese savings of which to speak! There is no Confucniams. So please stop conflating it with “Asian Values” and with Weber etc. Are cultural predispositions important to economic behavior? Hell yes! They determine economic outcomes. What are China’s cultural predispositions? Are they “Confucian”? They are ” east asian” in the sense that attention is paid to timeliness, cleanliness, and to work as such. This has helped mobilise economic reources in China. Definiltey. SAvings?

            How can China save anything if there is nowhere to put your money!? Let’s start with that. There is no market for savings. There is crappy real estate. And the Chinese are buying real estate, for what reason? For cultural reasons?

            Hm. very tough question. Let’s talk about it separately, shall we?

            Yes, let’s stay more focused. I simply disagree with readers who say you are humble. You are not. Nor should you be. But be prepared to have more than lackies read your blog. A debate should be factually based. Your readers jumped on me for personal issues. I dont care. We can stick to stylised facts.

          • from your own link (the LSE paper): “Balazs wrote that Chinese merchants did not foster capitalism because they diverted their profits to the purchase of land (for reasons of security and prestige), and to non-economic uses, such as entertainingthe scholar-elite, building pleasure gardens, collecting art and books ,and not least, preparing their own sons to participate in the im perial examination system for gaining entry into officialdom. ”

            gee whiz! sounds remarkably true today. Seems to explain more than economics, Professor. China is not capitalist, is it? Why not? Because its vision of things is a kind of confucian obession with administrating its way out of everything. Culture. Does a body good.

            Let’s be concrete for once. Are Chinese households saving, or are they investing in real estate? What are their savings, in deposits or investment?

            I venture Chinese are 80% in real estate, second in education (tutoring), and third in direct loansharking rather than deposits. I mean why would anyone in china have a CD if the rates are junk?

            Is Chinese culture Statist? Of course it is. Is that of South KOrea, Singapore, Taiwan. Yup. Can we reasonably relate this to “neo-confucianism”? Perhaps. Can we dismiss out of hand the influence of some cultural commonality? Certianly not.

            MOre bluntly Professor. Do you consider Japan a market economy? Is South Korea, Taiwan, and Singapore? Are they market economies? Are they Capitalist? That’s what the Confucian debate is also about. As per being thrifty, they are all extremely thrifty, and despise personal debt. This is a cultural value. It has never changed. There is not a moment this was different.

            you hopefully all note, that Eckstein, Yang, and Fairbank, did no more than reiterate Weber’s asrgument as to why China never developed capitalism. This was the issue. It was not about today’s debate, whether China is industralised or is not industrialised. Everyone understood that China had industrialised. The question was, why capitalism did not arise. This question remains with us. So you cannot produce proof or evidene of anyone at any point in time linking Confucianism with profligacy. Confucianism was linked to a lack of capitalism. An ongoing issue.

          • The reason Europe developed while China isn’t hard. It’s war. I’m convinced the reason we have “development” and “progress” is for war. For example, living standards dropped after the development of agriculture, but agricultural societies could sustain much higher populations and were better at war. This is why the European countries were able to effectively take over the world: they were superior at war! Now, they’re no longer superior at war, which is why they basically hold little power.

            The reason you even had the geopolitical structure of Europe (centralized, militaristic nation-states) develop is because there needed to be a way to prevent one group from unifying Europe. So there was a need to keep the balance of power. In order to do so, you saw cultures, societies, and ideologies (ex. nationalism) co-develop with the geopolitical and economic necessities of the region. It’s that simple.

            Now, we’ve spread this disgusting nationalism across the entire world. The most dangerous things in the world are these large-scale nation-states that we’re starting to see break apart. The world is heading to a smaller, more decentralized place. Secessionist movements in Scotland and Catalan are just the beginning. Soon, we’ll see movements in other centralized countries like China and possibly even Russia to take hold (although Russia has a different geopolitical structure and isn’t a nation-state IMO).

            Why do people always talk about “development” without talking about war? Many institutions (ex. central banks) were created explicitly for war. In your entire comment, PerplexedReader, you never bother to mention war once.

          • Michael

            Confucianism and Poverty

            Answer: Max Weber, who thought that Confucianism and Capitalism were incongruent due to considerations of Asiatic Despots under Confucian systems.

            For that matter, most all of the literature before the advent of “asian values”, which is what saw the change in perspective, from what had existed, as you note, so, not really sure why we are perplexed, on this matter, or what the import of it is regardless.

            Apparently McFarquar was the first to note the positive view of Confucianism, then was followed by Lee Kuan Yew and Mahathir, and reams of young scholars from Korea and Taiwan, and elsewhere.

            Park Chung Hee’s attempts to eradicate Confucianism in Korea, in the 1960’s and 1970’s were due to the belief it inhibited innovation, change and development (the Enlightenment and New Community movements” (architect of Korea’s Miracle of the Han River); an authoritarian himself.

            Chung Hoon Lee, Culture and Institutions in the Economic
            Development of South Korea, Korea Observer, Vol. XXVIII, No.
            4, Winter, 1997.

            Thee above supports your thesis as you contend

            Perplexed, I will stop here but this took three minutes and google. Why would you place a bar for Michael, when you yourself failed to even check.

          • Michael

            As to your experience, I have some experience living and working around the world, and working cross-culturally, virtually my entire work-life. I see as you do, and am really surprised about how often people, even those who believe they are supporting some other group, or perspective that they believe another holds, that is held by another “culture”, are often so horribly mistaken, that is insulting. that they themselves, can not even see the difference. How so often it seems as if people from Venus want think they can understand what it is like for the Martians, then the Martians themselves. Often well meaning, but inevitably naive, oft insulting, and quite contradictory to intentions, while certainly confusing more generally for understanding what pertains, and obtains, to the world as it exists. Culture, I’ll leave that to the artists in Hollywood, although thoroughly enjoy drinking, face-cringing, rot gut with construction workers in some “backward” place, or the finest of cuisines, that none of them could afford.

  28. If trade is the transmission mechanism for all this would trade limits, like Warren Buffet’s trade certificates, or tariffs not be the best solution? Reading over Mariner Eccles Senate testimony he stated ……

    Our people need and want everything which our abundant facilities and resources are able to provide for them. The problem of production has been solved, and we need no further capital accumulation for the present, which could only be utilised in further increasing our productive facilities or extending further foreign credits. We have a complete economic plant able to supply a superabundance of not only all the necessities of our people, but the comforts and luxuries as well. Our problem, then, becomes one purely of distribution. This can only be brought about by providing purchasing power sufficiently adequate to enable the people to obtain the consumption goods which we, as a nation, are able to produce. The economic system can serve no other purpose and expect to survive.

    Of course he also knew the ramifications of inaction and quoted another economist (?)

    It is utterly impossible, as this country has demonstrated again and again, for the rich to save as much as they have been trying to save, and save anything that is worth saving. They can save idle factories and useless railroad coaches; they can save empty office buildings and closed banks; they can save paper evidences of foreign loans; but as a class they can not save anything that is worth saving, above and beyond the amount that is made profitable by the increase of consumer buying. It is for the interests of the well to do – to protect them from the results of their own folly – that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit. This is not “soaking the rich”; it is saving the rich. Incidentally, it is the only way to assure them the serenity and security which they do not have at the present

    • Bravo, the pendulum swings……..
      I suspect Piketty’s book will stoke interest, as there is much interest to stoke.

      Inevitably, despite the lamentations of ideologues, I suspect most things swing on pendulums, and necessarily it will swing back in the other direction, and perhaps even overshoot as the market does.
      Certainly, more countries will have to alter, and to do more toward creating the foundations that support the stimulation of internal demand within domestic economies as global trade continues.

  29. On the subject of savings, isn’t it simplistic to say that increased saving always lead to increased inequality? While increased saving by the wealthy will increase inequality, doesn’t increased saving by the middle and lower class reduce inequality? And if one does not have guaranteed job security, it would be dangerous to not save money.

    • Simplistic maybe but almost certainly wrong. I think most people put it the other way around. Higher inequality tends to force up the savings rate, although there must be a counterbalancing impact, resulting either in lower savings elsewhere or higher productive or non-productive investment.

  30. If I am not veering off the major topics discussed here, I would like to mention that India’s diversity is an asset (as Michael claims) maybe only in a social sense, not from an economics or governance point of view. There is strong evidence within the economics literature that greater ethno-linguistic and social fractionalization results in poor economic outcomes, namely an underinvestment in public goods critical for development and also worse institutions. In fact, one prominent economist calls this the strongest result in the entire literature on political economy


    • Diversity is always an economic advantage and specialization is a disadvantage.

      Specialized economies are almost always short volatility as small shifts in the demand for certain goods can send things south very quickly. The US is probably the world’s most diverse economy, but it’s also the strongest (by far).

      By the way, that paper is complete BS. They’re using bogus regressions and statistical tools that the authors clearly don’t understand. Regression analysis is virtually useless when dealing with complex systems and the more complex the system, the more likely the correlation is spurious.

      • @Suvy

        Your comment starts with a statement that diversity is always an economic advantage. From your next paragraph, it seems you are talking about diversity in the economic structure or production base of a country whereas I was clearly referring to other kinds of heterogeneity. Maybe you were too impatient to read my comment before responding! Regression analysis is “complete BS” – the authors are using “bogus regressions” that they “clearly” don’t understand. It is “virtually useless” etc etc. Are you sure you want to have a dialogue? Or you merely want to express your views which are based on absolute certainties and are therefore unscientific in the deepest sense of the word. I don’t think it is easy to respond to a generalized rant against economists or whoever. (We can argue till the cows come home on whether economists do anything useful – I am not interested in those kinds of discussions which are really about expressing our subjective views and biases on various issues). It is easier to respond to specific arguments which are made on the basis of specific pieces of evidence/research. I made two such arguments and cited the evidence, which as it happens, is quite strong. First, I claimed societies with higher ethno-linguistic diversity will tend to underinvest in public goods, ceteris paribus. (and public goods are extremely critical for a low income country starting out on the path of development). Second, what explains why some countries don’t manage to develop good Institutions? There can be many reasons – but I suggested ethno-linguistic fractionalization is among the initial conditions that makes it harder (much harder) for countries to develop good Institutions. (Of course it is a relatively common argument in the literature). This argument is just as intuitively appealing and based on theory/evidence as the previous public goods argument. Institutions are the “rules of the game” in a society – it requires lot of social trust to agree on a set of Institutions because among other things a) Institutions decide how conflicts between different groups in society should be resolved b) Institutions influence/determine the distribution of resources in a society. Societies with low trust are less likely to have developed credible Institutions. These arguments are based on economic/political theory and there is quite a bit of evidence as well. Of course, one may choose to disagree, but reading your arguments (where you are more interested in ranting against economists and showing off your supposed superior mathematical rigor) I doubt whether you understood my arguments. It is better to disagree with a particular argument AFTER you have understood it clearly.

        • I understood your argument 100%. There’s no mistake I made.

          You’re citing papers using mathematical models and statistical tools that don’t even bound their error. How is that legitimate? The data sets don’t go past 50-60 years (and in most cases were less than that), but you’re claiming that these tools “prove” the points they’re trying to claim. First off, the data set isn’t even long enough to contain events that we’re interested in which makes the papers themselves virtually useless.

          Secondly, risk lies in the future, not in the past. Tail events are events that usually aren’t preceded before and will not be repeated again. Any sort of model trying to understand tail events (which are the events we’re primarily interested in) can’t be detected by the methods employed in the papers.

          Thirdly, people who understand math, statistics, and probability don’t take economics or political science journal articles seriously for a good reason.

          “Or you merely want to express your views which are based on absolute certainties and are therefore unscientific in the deepest sense of the word.”

          The arguments I’ve presented are more scientific (and much more rigorous) than any of the work you’ve cited. That’s the reality. What I’m saying is with regards to the flaws in the models that’ve been used and the flaws in the economics and political science articles you’ve cited are about as rigorous as it gets.

          Particularly on this topic at hand, I know exactly what I’m talking about. I’m using fragility based detection mechanisms.

          With the “trust” argument that you bring up, I’m not so sure I agree. The problem isn’t a matter of trust as much as it is a matter of incentives. Relying on people to be “good”, “well-meaning”, and requiring the people to “trust” the guys in charge doesn’t work. What works are robust set-ups whereby the system gains and gets stronger from error, volatility, and randomness. In order to have such a system, it’s extremely important for the incentives to be aligned properly.

    • Maybe this is a cop-out, but I think you both make valid points, Mitra and Suvy. If someone made the claim that ethnically diverse countries are more “expensive” to maintain socially, perhaps because there is less willingness by dominant groups to invest in public goods that benefit the subordinate groups, I would not find that hard to accept. We don’t even have to go to India to see that. In the US it would be hard to argue that public investment to advance the productivity of black Americans has historically been as high as it was for white Americans.

      I think homogeneity definitely reduces frictional costs, if only because societies with higher levels of trust are more able to transact with lower enforcement costs (its awful that I manage to talk about such flesh-and-blood issues in such a horribly dry and academic style). There is plenty of evidence that we automatically trust people more if they look, dress, speak, and gesture like us, and eat food that smells like our own.

      But as someone who thinks that long-term economic success is more likely to occur in countries that have more, rather than less, robust adjustment mechanisms, and because I believe that economic, institutional and social diversity tends to make adjustment more robust by creating a system with more moving parts and a wider range of ideas, which matters in the long run, I believe (but can’t prove) that ethnic diversity is significantly positive, as Suvy claims. If ethnic diversity is indeed a net positive, however, whether for the reasons we say or not, it is probably asymmetrically positive, by which I mean that it is positive more often than not, but when it is negative it is likely to be very negative because it can result in very nasty social conflict.

      I quickly skimmed the paper that you cite, Mitra, and while I don’t think it is as useless as Suvy thinks, I do think that it provides a really limited way of measuring the costs/benefits of diversity, and in fact points out more generally how hard it is to prove whether or not different types of diversity are positive or negative.

      If either of my two assumptions are plausible, this study would not be able to capture it. If the benefits and costs of diversity are asymmetrical in the way I suggested, this study, and unless you had a truly huge sample most others too, would find the bad outcomes to be statistically much easier to find than the good outcomes.

      If diversity entails higher direct social expenditures (or, which is the same, reduces value-enhancing investment in public goods), but it increases overall value by improving the systemic adjustment process by more than enough to compensate, it wouldn’t be possible to verify this assumption in the study you cite, or indeed in almost any kind of study I can think of, and because to me this is the main argument in support of diversity (it also seems to be Suvy’s main argument) it would be hard to accept any study as proving it one way or the other.

      I suppose the only valid way to determine if I am right about why diversity is so significantly positive would be to put together a data that classifies countries (highly diverse vs highly homogenous) and then just measures long-term performance. The problem is that you would need a much greater universe than is available in order eliminate biases and, and it would be hard to eliminate causalities that run backwards. For example, countries whose institutions are predominantly “Anglo-Saxon” have been among the most ethnically diverse and also among the most economically successful, and so their inclusion would skew the results in favor of ethnic diversity, but you can’t say which way the causality runs. What’s more, you could easily justify an argument that diversity is positive in very flexible and advanced capitalist economies but less so, or even negative, in more rigid or backward economies, or that the value of diversity depends on institutions that protect minority rights, etc. etc. All these reduce the number of valid cases.

      Unfortunately we tend to think that a few correlations prove something even when a more nuanced understanding of the math behind the models makes it clear that the models don’t test what we ask them to test. But that is a whole other topic.

      • I think it’s important to understand that there’s different kinds of diversity (ex. religious diversity, ethnic diversity, etc.). Look, I’m not saying that it’s a good idea to bring in people who have a completely opposite idea of what a society should look like. In those cases, it’s obvious that something isn’t right.

        Take the UK as an example where there’s a group of people who want to impose Sharia law on a part of the population. Obviously, there’s little economic benefit from the end result. I don’t think it’s fair to say that you’re against diversity by not wanting people who have the exact opposite views as you do. Look, I don’t want fundamentalist religious zealots being imported into this country (we’ve got enough of them), but not wanting to import nutjobs is different from saying that we should target a specialized economy where you’ve got people involved in, and doing things, that’re the exact same as each other.

        There are so many people here in this country (particularly among the brightest and most intelligent) that come from very different backgrounds. Not letting someone in when they’d be a productive member of society because of something like the color of skin obviously isn’t smart.

        With regards to economists using mathematics and statistics poorly, it’s because they have absolutely no rigor. A (very) large part about mathematics is about rigor. They don’t have any sort of mental clarity nor do they have sound thought processes. When I tell a lot of econ people that you can’t prove anything no matter how many examples you’ve got while all it takes is one counterexample to disprove a statement, I usually get looked at with a weird stare.

        Mathematics is really just a fundamentally sound way of thinking and transmitting large amounts of information. Statistics is really about communicating what the models tell you. Most economists don’t understand that. They use statistical models without looking at how the bounds fluctuate. They use probabilistic tools estimate the probability of rare events without realizing that the rarer the event, the larger the magnitude of the error gets. Few seem to grasp the idea about the difference between odds vs probabilities. You DO NOT want to play the probabilities, you want to play the odds.

        By the way, the mathematical errors go across all sorts of economists from all ranges of the spectrum including both mainstream and heterodox economists. For example, Joseph Stiglitz came out with the probability of one of the GSEs going bust in 2003 and claimed it was this really small number. This is mistake number one! You DO NOT try to estimate tail probabilities. It’s a sucker’s bet. Then, this guy comes out and claims to have predicted the financial crisis. This is a joke.

      • Thanks for your response, Michael. I don’t think the idea that ethnic/linguistic/social/religious diversity causes poor economic and political outcomes (other things equal) is based on a narrow range of correlations – if it were, it wouldn’t be generally accepted as a major result in political economy. I just cited one paper- but there are dozens of papers that I could have cited published in the best journals of economics and politics and using a variety of approaches that arrive at roughly the same conclusion. Of course I am not claiming that the debate is settled (debate on such issues can never be settled!) and the usual endogeniety problems you talked about are there. I didn’t completely understand your point about the benefits of diversity (what you were discussing about the adjustment process) but adjustment to a negative economic or political shock (for example) is MUCH harder in a country with a great deal of diversity. In homogeneous societies, during times of crisis, people come together to a certain extent to tackle national challenges, in diverse societies, they blame each other and start rioting! The interesting thing about the correlation between ethno-linguistic fractionalization and economic performance is that we can predict the channels through which the effect operates. For example, South Asian countries typically invest much less in public goods than East Asian countries and the former are far more diverse. Public goods in low income developing countries are absolutely critical for fostering and creating markets and for enabling people to participate in them. Among major Asian economies, the two clearest examples of development success that we have in the last hundred years are Japan and Korea, possibly among the most homogeneous societies in the planet. (I am not saying that by itself proves anything). It is also intuitively obvious (this is no correlation between weather and outcome of baseball matches) – if you observe politics at the ground level in diverse countries, you see people are focused on what one group can gain at the expense of another (India is a nearly perfect example, but hardly the only one) instead of what they can gain together if they choose to forgo zero sum thinking. Diverse countries can do well if they develop strong Institutions that coordinate decision making and resolve social conflicts – but how many poor countries (diverse or non-diverse) can develop such Institutions? We know it is an extremely difficult task which appears nearly impossible in some cases, at least in the short/medium term.

        Two more points – the experience of Angle-Saxon countries is not a counterpoint – Australia (where I live) maybe a quite diverse country today, but it wasn’t diverse historically (at all), The impact of diversity is via the quality of Institutions (and also investment in public goods which are perhaps even more critical at early stages of development) – countries with high initial diversity are less likely to develop good quality Institutions. United States is the only major exception as it was quite diverse even historically, yet they developed good Institutions and also a tradition of investment in public goods. Some countries maybe so diverse that they fail to evolve one common language, unlike the Anglo Saxon case. Luckily there are only few such countries, but India is among them. Contrary to what you think, the result is not only driven by cases of violent conflict (although it is true that diverse countries are far more likely to experience violence and civil war) – in India, for example violent conflict is quite low relative to other low income diverse societies, yet India severely underinvests in public goods which must be a serious drag on their development performance. To say diversity is an asset for India is only politically correct claptrap (!), at least from an economics/governance point of view, it is a HUGE challenge.

        Here are some articles from William Easterly’s website – Easterly used to do some research on this. These articles are not the best ones necessarily, but they were easier to find and they will document some of the things I am talking about.

        http://williameasterly.files.wordpress.com/2010/08/39_easterly_alesina_devleeschauwer_etal_fractionalization_prp.pdf (Journal of Economic Growth) – please look at the Conclusion. This paper tries to be rigorous in terms of measuring diversity and also endogeniety issues.

        http://williameasterly.files.wordpress.com/2010/08/17_easterly_levine_africasgrowthtragedy_prp.pdf (Quarterly Journal of Economics)

        http://williameasterly.files.wordpress.com/2010/08/22_easterly_baqir_alesina_publicgoodsandethnicdivisions_prp.pdf (Quarterly Journal of Economics).

        http://williameasterly.files.wordpress.com/2010/08/59_easterly_alesina_matuszeski_artificialstates_prp.pdf (Journal of the European Economic Association).

        http://williameasterly.files.wordpress.com/2010/08/47_easterly_ritzen_woolcock_socialcohesioninstitutionsandgrowth_prp.pdf (Economics and Politics).

        • I believe it is one of the main reasons why the European Union is so difficult to manage: now that it has been enlarged to 28 countries, from the Baltic Countries to Portugal, from Sweden to Greece, from Ireland to Romania, it is objectively very hard to define common goals and to identify common interests. While the idea of the European Union may appear generous to the point of receiving a Peace Nobel Prize, the reality for a majority of its citizens is that it has become this kind of invasive abstraction that means not much anymore to people or that is even now associated to negative feelings. The result of this too wide enlargement is a lack of cohesion – so obvious in terms of economic policy – and paradoxically higher fragmentation.

          To save the European Union, i think it would help to shrink it to a smaller group of more homogeneous countries (bearing in mind the already very diverse language, history, culture, habits of countries that are geographic neighbours and share a somewhat similar level of economic development).

          • By this argument, the US would be difficult to manage. Go and see the culture in Texas and tell me it’s anything like the culture in New York. Walk down the streets of Miami and it’s basically bilingual.

            The problem with the Europe/EU/Eurocrats is that the ideas that run many of these countries are corrupt. Everything they try to do is centralized and if there’s a problem, they all wanna fix it by more authoritarianism and centralization. The EU should be a military alliance and nothing more, but the guys in Europe (and really the ideas of most of the countries in the region) aren’t really the most sensible to say the least.

          • I certainly don’t underestimate the cultural diversity of the US (which may or may not be so easy to manage). Still, there is at least the ability to speak the same language from the Atlantic to the Pacific and from Mexico to Canada. Such a condition is not met in Europe. The European Union is not an union of the people. It is an union of the governments. That Europe is making it even harder for itself with poorly designed institutions and dominant ideas that are not conducive to fulfilling the potential of its people is another consideration, with which i largely agree and which is not incompatible with the statement that the fragmentation of Europe is a notch higher than that of the US.

        • “I just cited one paper- but there are dozens of papers that I could have cited published in the best journals of economics and politics and using a variety of approaches that arrive at roughly the same conclusion.”

          To be honest, this is kinda the problem. I wouldn’t take most academic journals in economics and politics serious. Just look at their track record at predicting and dealing with crises.

          “In homogeneous societies, during times of crisis, people come together to a certain extent to tackle national challenges, in diverse societies, they blame each other and start rioting! The interesting thing about the correlation between ethno-linguistic fractionalization and economic performance is that we can predict the channels through which the effect operates.”

          History isn’t kind to homogeneous societies with little diversity. The classic example is the Irish Potato famines. Also, most developing countries usually specialize in commodity production, which is actually pro-cyclical.

          “Luckily there are only few such countries, but India is among them. Contrary to what you think, the result is not only driven by cases of violent conflict (although it is true that diverse countries are far more likely to experience violence and civil war) – in India, for example violent conflict is quite low relative to other low income diverse societies, yet India severely underinvests in public goods which must be a serious drag on their development performance.”

          The problem in India is that the country took up socialist ideas upon the founding of the country. The country completely stagnated as population doubled from around 1950-1990 due to these policies. One of the biggest problems in India is red tape. My family and I visited only a few months ago and I remember my father needed 4 signatures. It took him more than a week to get 4 signatures because of all of the red tape.

          By the way, I was looking through some of the papers and the methodology that’s used isn’t valid (just like the first one). More than half of these papers use regressions, but don’t even have residual plots. The people who wrote these papers aren’t very good mathematicians and it’s papers like this that turned me away from studying economics. There’s only one paper that I spotted out of all of the ones you linked that COULD have a legitimate use of mathematics.

          This brings me to my next point, economists need to stop using math they don’t understand. It doesn’t make you more legit to have something that looks fancy just because it has calculus or complicated statistical models.

          Another problem with ALL of this data is that you’re working with limited sample sets. 30-40 years of data isn’t a proof of anything and is much too small a time frame to determine anything.

          All of these problems are the most basic statistical errors that any person with a sound foundation in mathematics/statistics would be able to spot.

          • @Suvy

            Let me respond to a few points…

            “To be honest, this is kinda the problem. I wouldn’t take most academic journals in economics and politics serious. Just look at their track record at predicting and dealing with crises”

            The level of economic illiteracy reflected in your above statement is quite staggering. It is a bit like saying you don’t trust doctors because they cannot predict which person will develop which disease. If you had any actual understanding of Economics as a discipline, you would have understood quite well why economists cannot predict crises or cannot pick winners etc etc. Any graduate student of Economics will know this. Heck, I even teach this to undergraduate students. (Why economists cannot predict which countries would be successful or when there will be a crisis). Additionally, most developing countries don’t specialize in commodities production today, not even close. Given how little you know about Economics, why not state your opinions a little less confidently?

            Then you write
            “The problem in India is that the country took up socialist ideas upon the founding of the country”.

            We were discussing Investment in public goods, nothing to do with socialism, at least no direct correlation. I am not supporting Socialism, but please don’t believe your political ideology (which if I understand correctly is critical of socialism) provides the answer to all questions. Vietnam is also a socialist country, but it doesn’t have India’s pathetic record on human development. A person visiting Vietnam will come away with a very different impression than someone visiting India, even though the two countries are ranked quite similarly in per-capita income (on PPP basis) . Bureaucracy is bad in many poor countries, India may well be a bit worse, but how does that explain underinvestment in physical and social infrastructure?

            Finally, with due respect, I doubt you are as big of an expert on Math or Statistics as you claim to be – if you were you would have had more rigor in the way you advance your claims or arguments, and you would be less dismissive of people working in an entire discipline. If you believe you can advice Bill Easterly on regression analysis or such elementary statistical issues like residual plots and what not (!), then go right ahead. Economists use a variety of methodological approaches – regression analysis is one among them, you have made no arguments on why it is “useless” – there are any number of economists (I am not even talking about big names like Easterly) who can explain better than you the pitfalls of regression analysis as a methodological approach, but they believe it can be used to learn some things. Finally, don’t hurl phrases like complex systems analysis to intimidate economists (!) – it is a well known quantitative method and many people use it in economics (if they are investigating problems which will benefit from use of complex systems analysis) – the criticism against economists that has gained some traction in recent years is not that they are mathematically unsophisticated, (no body who have spent any time reading good economics journals or talking to top economists would say that – I doubt you have done either), the criticism is that some economists have become so proud of the mathematical sophistication of their models that they have forgotten that economics is a social science. What I like about Easterly is that he is definitely not among this tribe.

          • I’m aware of the mathematical tools economists use, and almost all the time, it’s complete garbage. There’s a reason why I chose to study mathematics instead of economics: it’s because when economists use math, they suck at it. They get the most basic, fundamental concepts wrong. How can you use a mathematical model without bounding your error? I’m sorry, but the mistakes that were made were the most basic mistakes.

            By the way, the economists unable to predict a crisis response from you is a complete cop-out (it’s not rocket science to see debt/GDP ratios blow up and price/rent ratios go way out of line from the norm to see there’s something crazy going on). It’s because (most) economists don’t understand anything and most haven’t even looked at a balance sheet in their lives. When I took intermediate macro, I was taught IS/LM. Of course, it’s not a very good model. By the way, do not compare economists to doctors. Doctors practice a trade and medicine is a trade. Economics is not. The people who have the best grasp of economics aren’t even economists. In my opinion, the best financiers and often times traders (ex. George Soros) have a better grasp of economics than virtually all economists. Why? It’s because their failure to grasp key concepts costs them money. All the guys who don’t know what they’re doing get wiped out.

            If the economics profession is so great, why do we teach the works of average economists like Milton Friedman, but not teach the works of great economists like Hyman Minsky or Charles Kindleberger? I was taught IS/LM as “Keynesian”, but Keynes explicitly rejected the model (see his paper Alternative Theories of the Rate of Interest). Most economics students I’ve met don’t even know how money is created. They don’t talk even talk about asset bubbles and international flows of capital. In all of the economics classes I took while I was in school (which is relatively recently), we never even touched on private debt. Most econ kids can’t even look at a balance sheet and tell what’s going on (and neither can most economists for that matter).

            How can you talk about an economy while not talking about money, banks, and debt? Well, that’s what they teach most economics kids today. The kids in the class spend too much time doing calculus and far too little time studying history and geography. That’s another thing BTW that’s rarely spoke about in economics: the role that geography and culture play.

            You can personally attack me all you want and I don’t give a damn, but you haven’t refuted a single thing I’ve said. Instead, you’ve resorted to ad hominem attacks.

          • @Suvy

            Its a bit rich you complaining about ad hominem attacks! The reason it seems to you that I haven’t refuted your arguments is statements like the following are hard to refute “I’m aware of the mathematical tools economists use, and almost all the time, it’s complete garbage” – I don’t know of any economist or any serious researcher in any field who will be the least inclined to respond to such (to use your favorite word) “garbage”. And I don’t even know what it would mean to refute such claims. You have expressed your view that economists don’t do anything useful because they don’t know Math (or something of the sort), you also expressed your subjective political views on a range of other issues which had nothing to do with anything that was being debated. You failed to present a single cogent critique of regression analysis beyond comical statements like most of the papers I cited not having residual plots etc. That is a bit surprising considering how easy it to present a reasonable critique of a basic tool like regression analysis. Anybody with a serious academic training (in ANY discipline) will make arguments more carefully and make categorical statements less recklessly than you do. The other things that you go on and on about has no relevance. The IS-LM model is not even taught in graduate macro classes. Just because you have taken a few courses in Statistics or Mathematics doesn’t mean you conquered the world – many more courses than that in those disciplines are taken by economics students. This is my final response.

          • IS/LM isn’t taught? That’s what I WAS TAUGHT! This is the book we used. It’s taught to everyone here in the US.

            Taking a few classes in statistics or mathematics? I’ve got a Master’s degree and I’m working on my PhD in the field?! I live and breathe this stuff!


          • Warren Buffett writes half-jokingly in his annual report that he would happily pay for finance students to be taught the efficient market theory and other dominant ideas of similar practical relevance so that he could continue to enjoy his advantage in analysing and investing in companies with strong business models and strong managements without too much competition.

            Georges Soros similarly says that the efficient market theory is not compatible with his experience of the markets. His framework of self-reinforcing boom – bust pattern is explicity in contradiction with the efficient market hypothesis.

            What Buffett and Soros have in common is that they have empirically demonstrated in the real world and over long period of time the validity of their understanding of how the economy and the financial markets work.

            Since that is the ultimate judge, there is nothing more to say.

            Helping the economy to recover by inflating an asset bubble (so called “wealth effect”) has also been empirically tested in the 2002-2007 cycle. The result was the disaster that we saw. When a theory and the facts are not in accordance, it is always the facts that are correct.

  31. A gentle reminder to my readers: in the past week I have had to reject a few more comments than normal. I try to keep the comments section open to debate and disagreement, but aside from rejecting comments on politically sensitive topics, I do from time to time exclude what may pass for brilliance elsewhere. If anyone whose comment was not approved is comforted by the idea that I was too ashamed to respond to its incisive brilliance, as is sometimes implied in follow-up comments, I have no problem with that.

    As an aside, to me the use of litmus tests on matters other than of faith suggests not so much an overpowering intellect but rather an inability to understand complex ideas. If you know with complete certainty which side of a centuries-long controversy is right, then the chances are that you are probably in way over your head. If you believe, for example, that only an idiot could possibly acknowledge that gold-backed currencies have positive attributes, or, alternatively, that fiat currencies have positive attributes, it would take a lot to convince me that monetary economics is your strong suit.

    I should also add that however often we might accuse others of stupidity, we rarely engage intellectually with people we think stupid. To the extent that you insist that your opponent is stupid, again, I can only assume that you are trying to punch way above your weight. And finally, although I have nothing against exclamations points, if any of your sentences have more exclamation points than words, it isn’t usually a good sign for me and, especially if it is a long comment, I am unlikely to read the whole thing. Sorry. It may be a silly prejudice, but it is a strongly-held one too.

  32. Did anyone else see this report by the Wall Street Journal? One of my friends sent it to me earlier today. It’s about the Chinese leadership talking about replacing the old central bank head with a new guy.

    The person that sent it to me thinks that if this goes through, we’re likely to see high growth rates until China hits debt capacity constraints. I’m not so sure and I still think we’ll see a drop in Chinese growth rates. I don’t know anything about the particular people that head the PBOC, but apparently this guy was really pushing hard for reforms. He’s also pretty old, which could be a reason for his replacement. I just wanted to get all of your thoughts on it and what possible scenarios and risks this report brings up.

    • These rumors have been around for two weeks and are pretty credible. But if Zhou retires soon it doesn’t suggest to me a change in policy, although I do think Zhou had a prestige both domestically and internationally that will be hard to match, and he would probably find it easier than his replacement to press his views on the president and the premier. Zhou had already passed the official retirement age before Xi Jinping came into power, and only remained in office through some bureaucratic maneuverings by the president. I think his remaining in office was a very good sign because it indicated strong approval of his reformist policies, especially because they had to bend the rules to keep him there, but because of his age there never was any chance that he would remain in office long. At any rate PBoC policy is going to be whatever Xi wants, and not what the PBoC governor wants.

      There was some suggestion in the WSJ President Xi wanted “to place more allies into top positions”, but I am pretty skeptical about this as the reason. If Xi didn’t trust Zhou, then why not make him retire in early 2013 when his term had anyway ended and he was too old to start a new term? It would have been very easy and would not have caused any speculation. Their relationship could have soured since then, but I don’t see any reason why it would have. Xi’s keeping him on was, to me, a signal of favor, and it was followed up by other appointments that signaled favor.

      The odds are that Zou’s replacement will be Guo Shuqing, who has the same kind of credentials as Zhou as an economic reformer and who is close to Lou Jiwei, the finance minister. Given the traditional bad relationship between the PBoC and the MoF, this might be a good thing. Guo’s career includes a stint at the State Commission for Restructuring the Economic System, where he advised Zhu Rongji. He was later deputy central-bank governor, and after that chairman of CCB. These are are all solid credential in the Zhu Rongji/Wang Qishan/Zhou Xiaochuan camp, and guys like him tend to be more worried about debt than about goosing GDP growth. Of course if it isn’t Guo, then we will have to wait to see what this means.

      For now I wouldn’t read too much into these rumors. The market won’t like them because Zhou was much respected and was clearly on the side of the angels when it comes to the reforms China must implement, and there is no way that this won’t cause a little more uncertainty and worry, but it had to happen sooner or later. Maybe it is better that it happens now, rather than later when economic conditions are likely to get hairier, as I expect them to.

  33. The policy on most author’s blogs, is that the author is king. You always get to pick and choose what comments you want to appear on your site.

    That said, there is a danger of censorship, no lesser than with corporate or governemnt, that all authors should be aware of. If an author raises a thorny issue, how much must he be prepared to allow opinions which disagree with his own, before the blog or website itself turns into an echo-chamber of “les bien pensant”, with its implied reputation costs?

    I would venture professor, that your take on diversity, is a controversial issue, and if you decide to censor dissenting opinion, it wont reflect well on your own credibility. I mean that’s just the nature of a blog, isn’t it? Cultural issues, are the same.

    I dont want to hound you on Confucianism, but I have to admit that as someone who has had nothing but esteem for your work, I am a bit upset to see that the tenacity with which you want to cling to your ideas, reveals a lack of flexibility, and I would say modesty. SOmeone commented here that you rae modest, but I beg to disagree. Modesty is when we are prepared to see the possibility of being wrong. When I read your very very long answer to the savings/cultrue debate, I ask myself one qusetion, that I would put to you – is there any scenario in whcih you are prepared to cede to the cultural argument. The impression you giev, is no. Hence, it seems that rather than being open-minded about the possibility of being wrong, you are categorically a priori fighting against a hypothesis, which somehow challanges something very close to home.

    What gives? Why not just debate it further?

    Again, in which scenario are you prepared to cede that culture can or does matter. None of which you outlined, fits the condition. If your idea cannot be falsified, then what is it, in Popperian terms? It’s not a valid hypothesis then.

    Nor can you accuse others of being too pushy with their ideas, when you show such adamance and inflexibility in your own. Hence, let’s stick to your exclusion of cultural factors. If all of your scenarios are true, and culture cannot be a factor, then let me add few more scenarios.

    If Chinese and German savings are not a reflection of culture, why is it that neither the Japanese, the Spanish, or the Americans, foudn themslves able to replicate or follow the same strategy as the Chinese and GErmans in order to beggar their neighbours?

    Judging from your writing, the reason America did not follow in their stead, is because so far it is still benefiting from global trade but as you say, at some point, it will introduce barriers to the purcahse of its debt. Right? This is not a falsifiable proposition, so perhaps irreevant?

    Why didn’t Japan then simply imitate China, lower its prouction costs by sterilizing useless American debt of which it could become the number one buyer?

    IN terms of Spain, we can all understand that it was less productive than Germany. Was France? Was England? Why didn’t they decide to force down wages by not raising them, and allow for oversavings, or as you say, a contraction in internal investment?

    Again, I would venture you imagine a very simple accountaing relationship where there is a very complicated economic one. I dont agree with your automatisms. With the idea that a lack of wage growth automatically had to become a current account surplus for germany, i.e. that savings = capital exports. It’s not automatic, becuase between the two stands the question of investment potential in Germany itself.

    A second conundrum arises when you use terms interchangably, that is to say, if we speak of wages, we also speak of productivity. We can’t merely speak of savings, wages, and capital exports, as if they are accounting identities. In speakign of wagse, we also speak of productivity. Rather than abstracting the international trade system away into balances, we can ask what are the productivities represented by these imbalances, and then ask what this represents in terms of capital formation at the national level.

    For example, you speak of German capital exports, and just liek with the question of China, you ignore that two culturse, with intense proclivties towards investing their moneys either into real estate or into accounts, just happent o be in positions where no other culture, traditionally much more savings averse, are not. Germany has the largest number of small banks of any european country. In fact, exactly half, followed by Austria. Rather than suggesting this translates into capital exports, I would suggests it reflects something abotu capital formation, linked to cultural habits of teh GErman people, in precisely the same manner that Chinese households, in keeping with an implicit neo-confucian attitude are plowing all their money into the only savings product available to them in their country – real estate. Cultural habits are impacting capital formation.

    I have no idea why you are so averse to cultural explanations. Perhaps a cultural bias itself? From the business world, or economics?

    As for diversity being an advantage, are you open-mided to the argument that it may not be an advantage? Nearly every proponent of the idea that dviersity is an advantage, isn’t. As you point out, intelligent people dont debate with those who they think are stupid, and this point does not go unnoticed to all the “stupid” folk out there. Yes, they’ve noticed fifty years ago that the rich, love diversity, and despise the poor who may have a different take. That whether or not you think diversity is advantageous seems to have a lot less to do with honest intellectual debate, and more with the ability to censor and ignore the “stupid.” The irony is that these “stupid” ones are simply not in a position to censor anyone, hence whether or not diversity is good or bad seems to hvae painfuly little to do with intellectual debate, and much more to do with with the cultural and social prejudices of those who can censor others.

    It would perhaps be less advantageous to the Le Pens of the world, if economist sand busiseness people stopped having this attitude. It would give the impression that diversity isn’t somethign that is found advantageous only to elites, and not common people, who are regularly treated as “stupid” when the issue is raised, and subsequently censored in all media and blog when they raise their objections to culturla enrichment. Ultimately revolutions do not happen because the masses are ignorant and stupid, and the elites smart and knowledgable. They happen because a profound rift between the ideology of the rich, and that of the poor, is created. Censorship, in any form, be it in a dismissive attitude, or outright deletion, certainly does not strike me as in any conceivable way being able to bridge this divide. Economists and business people, often seem to miss the point that they are not perhaps merely more intelligent and hence more successful in life, but that their wealth and success prejudices them towards certain ideas which are easily conflated with a general reality for all human beings on earth.

    • Now it seems you have confused perplexity with silliness. Perhaps because I am one of the British “groupies” I want to comment again on your bad manners. The Professor obviously spends a lot of time to read and respond to the many and sometimes unbearably long comments his blog generates. When you wrote you own very long-winded “critique”, almost all of which was quite useless, he took you seriously enough to respond, and he showed without any doubt that the same cultural explanations used to “explain” China’s recent growth have previously been used to explain China’s earlier lack of growth. You responded with several even longer nit-picking comments that really only made two argments. First, you refuted his claim that culture explains nothing at all (a claim that neither he nor any rational person would have ever made) by cleverly suggesting that this might be a cultural bias, a twisty sort of argument which judging from your spelling and grammar must have pleased you very much. Second, when the Professor said that many economists in the 1960s were influenced by Weber, Marx and the Maoist anti-Confucian hysteria, you simply announced that neither Marx nor Weber are economists (what?) so therefore his argument is wrong (what??). Now you complain that he is vain because he maintains standards of politeness in the comments sections (I only wish he also censored for length) and very vain because won’t change his mind even in the face of your excellent refutation. Maybe you’re right, but maybe he was, like me, just unable to find anything in your comments that should cause him or anyone else to change his mind. Remind me (just one case please) where you successfully refuted any of the positions that the Professor has taken in this article. If it isn’t too silly, or too long, perhaps I can explain to you why you are wrong.

    • a) i think pettis has made it clear that he censors for bad manners, especially of the kind that says if you believe X then you are obviously too stupid to have an opinion, but even then he does allow some faith-based and ungrammatical assertions, like “the idea that demand can be stimulated, is too farsical to merit comment”. in general i think the comments section here is better than most, and quite a lot of people seem to agree with me.
      b) i don’t know why you think your arguments are so convincing and it is only pettis’s inflexibility that prevents him from admitting it. i have no dog in this race but for now i think pettis has done a better job of convincing you than you have of him, and the fact that neither of you have changed your opinions reflects more poorly on you than on him.
      c) by the way it is not only groupies who find you unconvincing. i think pettis is completely wrong on the question of inequality (march 23), and i said so in the comments section, and the result was a stimulating debate between us in which we both conceded some ground but both remain completely apart. no one attacked me or made fun of my disagreement with pettis probably because i presented it in a very different way than you did. i notice that there is often a big difference in reception between disagreements based on the desire to stimulate debate and disagreements based on the desire to show off one’s superiority. i find that when a person posts under his real name, he tends more towards the former.
      d) maybe pettis just didn’t get to reading your comments all the way. they are long and aren’t easy to read or follow. for some people, this is a forum they turn to because for whatever reason they value the pettis thinking process, and they resent long interventions that might more appropriately be found on the intervener’s own blog.

      • Yah yah yah, its alwyas the other person who is a troublemaker, not us. Yes of course. It’s really reasuring that I see not one of my arguments being treated even vaguelly> Yes, sorry, Weber and Marx were not economists. THe former was a sociologists who touched upon what we can call economic issues, and the latter was a political scientist. It’s not for me to explain the differences, so just look it up.

        I never cleverly made anything up. The savings rate in China is driven by Confucian values and that in Germany by German values. My point was that Weber and Marx cannot be distorted to have ever said that Confucianism was not frugal, which is what is being trafficked here. It is not fair to misrepresent anyone’s statements. Please dont distort my argument. I did not make straw-men arguments, the professor did. I did not misrepresent anyone. There is no point at hwich economists at any cited Confucianism as an impediment to Chinese economic or industrial growth.

        Economists and commentators cited Confucianism as an expalnation for why China never became Capitalist. It is still not capitalist.

        So what gives?

        You can’t just say “oh, economists blamed Confucianism for china’s lack of growth, but today they attribute to it China’s growth,” if it is not true. No economist ever did this except two at the behest of a sociologist. That’s it. The debate was about Ca-pi-ta-lism in the sociological field.


        What part of my argument are you people not getting?

        and whtehr you admit it or not, you all ceded the canard that “confucian” culture went anywhere beyond China. Since that is total bollocks invented in the 90s by Chinese diplomatic overtures to its neighbours following minor precedents in Singapore.

        Yes, the professor has cultural biases. The big cultural bias in economcis and business, and by elites of which the professor is a part, and amongst suburban commentariat on the net, is that you think your intelligence and success entitles to you to a vision of the world where everyone else is stupid. Immigatio, diversity, and econmic rhetorifc being a big part of it. Yes, economsts hate the notion of cultural explanations, but sociologists do not. Next economists like to tell us what everyone else said or did not say, and then not back it up. YOu guys did no one any service by saying that the distinction between sociology and econoics does not matter, nor by attributing things to me I never said. I think the cultural biases of professors, to pretend they have objective truths, are sometimes very very troubling. Rest assured I read as much of the profesor as all of you, and that’s probably why I happen to be significanly more throughal in my critique. Since I understood some time ago that I wasn’t sure if he was an economist or an accountant or a business guy. Sure, I was upset not to get a free subscriptio to his private newsletter. Sure! (ok, that’s partly a joke guys.). I am just tired of PhDs or doctors dismissing the rabble for being xenophobic and ingorant, and if you cant’ read between the lines, that’s your problem. I happen to know someo fo the comments the professor censored, and like I suggested to him, it hurts his credibility for those who know what he took out. I wont belabor the point. It was so predictable, but some colleagues at work also read him, and I knew when they showed me what they wrote, he would nix it. I was just a bit astonished when he right up wrote about his policy, since he isn’t aware how it might reflect on his reptuation> DId it spell arrogance and insecurity. You bet. The professor by the way knows a lot bettter than some of you guys, what I was getting at in my arguments. Dont swet it. You are smart, but you guys dont work in the field, so much so is obviuos.

        The bottom line is that no one is in a position to state categorically, that cultural values are not in some form influencing economics, and if you like, I have no problem making more conscise arguments. Perhaps that should be a rule for everyone then. Since the professor himself makes very lenghty replies its very generous of him to allwo others to do so. You are not required to read my comments no more than I yours, but if you are going to read them, then dont expect me not to respond when I feel you mischaracterise them.

        I did my best to lay out my idea, but at some stage work sets in and there isn’t time. Yes, I threw out a lot there. If you dont like cultural issues, and if you think it evil to point out that there is a cultural bias of the professor and a cavalier attiude to some thigns which express a lack of respect for other doomans, if you thnik it evil to in a debate call people out, then I prpose you address the simple questions of

        wehre the hell is a chinese person to put his or her savings. Please. Answer it.

        second, if you have a productive economy trading with a less productive, like Germany adn Spain, how does manipulaing a currency achieve a balance?

        fine, stick to these two points then.

        • Perplexed:

          Mandarin is not spoken by a third of the “Han” ethnicity; which would be the group we assume to be Confucian. It was chosen by the Nationalists in 1932, there are ten dialects, and, further by wikipedia, hundreds of dialects, of which Mandarin, and the Beijing (dialect or language, it is disputed as to what is which), was the one chosen for adoption across the nation. It can be assumed that in less than a hundred years, that it is quite some accomplishment that as many as do, can speak Mandarin at present.

          But you from some over-arching cultural impetus to the current configuration of the Chinese economic development model.

          Where the hell is a person to put his savings, yes, where we would all know, but the Chinese household is not the primary saver in CHina, in the early 1990’s it was slightly larger than Corporate and Government savings, and today it is signifigantly smaller. Every time I read household savings, I smile, because this dynamic, corporate and government savings, far overtaking households, has been well-established for some time. Last Data I have seen is 2008, about a third share for each. Of course, considering recent dynamics in the economy, replicating the US commercial banking system in but 4 of the last 6 years, we know the situation has become far more exacerbated. So that is savings, and I fail to understand what your point is. Forced savings high, enable high investment, construct growth, financial repression, continue functioning, current account surplus, get FOREX, bonds, printing, etc, etc, money growth, directed, government hands in each market, etc, etc, etc….. (even though some of their stocks are traded on Nasdaq, ok…..yada, yada, yada…….)

          Spain……nice, warm, cheaper, previously by Northern European standards, cycling large flows of capital, ability to lend across states with tighter union, lotsa land and warmth, colder northern climes, summer homes, retirement homes, money flowing in, switching, investment focus, profitable to be in real estate, more domestic and regional capital in real estate, rising wages and wealth, increasing income, more access to cash, rising assets, crash…..while Germany, a debtor at the beginning of the process, still paying for East German integration, moderate growth, continuous deficit, bargain due to the structure of the system, with labor and corporates and governments sharing seats at table, agreement to hod down wages, and similar structural surplus, especially with great expansion of emerging markets, but only really doing well since the downturn, generally, not sure where you get the culture aspect, as if a longer-term trend, which of course it wasn’t, not sure what business you are in, not knowing that (check out trading economics).

          So, Gemrany aging population, pensions, poorly capitalized banking system (problems previous deacdes in lending, not just domestically but Europe wide, and eastern europe, not as bad as Austria, at three times the Austrian GDP, but…)

          So, Spain leaves, devalues, will have Euro denominated debt, but their own currency. Will be able to import less from elsewhere, will produce more domestically. Will even attract FDI, in Euro’s, that will then even be able to be used by the government, as others do, to pay off Euro debt. The people will be poorer vis a vis Germans, but will have employment, and investment, and diversification of the economy back toward productive capacities that were winnowed away during the high growth on the back of investment period. Not terribly dissimilar structurally from other situations. Take Australia, recent focus on Real Estate (couple decades), commodity booms, rising AUD, decreasing manufacturing (Ford leaving, not 1 Australian Food company, of Australian origins left), rising wages, rising house prices, rising asset valuations, now lessening commodity exports, falling AUD, eventually a restructuring and movement in other directions, likely lessening rational for increasing asset valuations…..

          Manipulating a currency to achieve a balance…..Spain vis vis Germany, will not be able to buy as much German products, thus will produce more domestically, and will attract investment, and be able to compete where they might not have. Just as having a stronger currency has led to the hollowing out of indsutries across the southern periphery, the weakening of it, will see a reversal of the effect, on multiple fronts, if only to service domestic constituencies by domestic production. But of course the effect will be more profound.

          Germany has seen great growth since wages stagnated in respect to productivity, China has seen tremendous growht, post initial early movement from agricultural, early stage grwoth after its economy had a crisis in 1993, where it devalued in 1994 (by 80-84%). Why would Spain not see some similar dynamics?

          This of course points to the larger issue, that if countries do not mature, and come to a more clear understanding of what is happening, why it is happening, adn why this is not likely to continue, we will see more than merely a reversal of income inequality dynamics as we move over the next few decades, but alterations to the very functioning and operating of the global economy, where the story of the great shift in power from East To West is but a fantastical headline shown in some future movie. It just won’t last, and the last thing most of the world should desire, is the retrenchment, of the very people who have long-supported an open multi-lateral governance and trading system, as their minds remain, in the ideological, sociological claptrap, that became popular among counter culture baby-boomers and their anti-imperialist, Marxian cousins. That stuff is finished.

        • Perplexed:

          Have you read Fukuyama on this, and i do hope you are not one of the people who have taken him out of context on 1989’s End of Histroy and criticize willy nilly we having not reviewed his perspectives as too many are want to do, the first book below gets released in a few days, the second has been out for a few years and is the one I recommend to you, The origins of political order, i find his thesis compelling….
          And do get the Collins work, a masterpiece, but at 900 pages, takes a while…


          Political Order and Political Decay: From the Industrial Revolution to the Globalization of Democracy by Francis Fukuyama (Sep 30, 2014)
          $35.00 $22.14 Hardcover $14.44 Kindle Edition

          The Origins of Political Order: From Prehuman Times to the French Revolution by Francis Fukuyama (Mar 27, 2012) $18.00 $12.97 Paperback

    • Perplexed, I for one, would like to say, mostly, I really enjoyed the specificity of your arguments, supports, and similar. Thanks, but relax, really (not tongue in cheek, relax and bring us more as you have the time, but, I might say, I find it strange that you suffer from many of the criticisms that you offer the good professor. And frankly, in many ways, Fail to see how you differ, from post to post, I went from, this is interesting, to ahhhh, what, what, isn’t that essentially very similar to what you accused Michael of, insofar as to attaching willy-nilly, jumping domains, making unsupported claims, …..then I thought, perhaps you had had too much coffee or something. But some of what you have are gems, and it seems that you might have more to offer, were you to slow it down. For example, South Korea and Japan despise personal debt, have you been following the charts, what decade are you living in. )

      A few points in the many writings you have written.

      The world would have listened to Roubini; it did in retrospect, after the crisis, whereupon his immediate predictions of what was happening, and would happen, were all incorrect, and largely incorrect until he changed course but a little while ago in all this. One need only look to 2008, 9, 10, 11 (changing) 12, 13, 14….. where many of his opinions are not dissimilar to Michael’s, at this latter stage, btw. Even Martin Wolf has changed course, but that is another discussion.

      Then, many of the commentators on “Follow the Money”, were right, as Roubini, so not sure what could be meant, but that Roubini’s marketing team might be better than Michael’s, for that matter, might also Steve Kean’s. Who was as right, perhaps more right than Roubini, and certainly less heeded, and while not being a fan of Steve’s, am not sure that that is better, worse, or even matters (in respect to heeding Roubini or Keen, but then I am not sure that Michaels goal is that others heed him, which of course would matter, in the discussion of heeding, and may not be of concern, in relation to either Keen or Roubini, so we might ignore). And just to note, I was right in 2004-2005, as to 2007-2008, so Roubini, Keen, Michael and others should hold no special merit of this, regardless. Unless too, I get some, whereupon I will of course acquiesce to the grandest of acclaims for each of us. Yet, I suspect that Micahels perspective has been gaining ground. While we cannot jump domains easily, theories, for what they are worth should generalizable, accurate and simple, where only two of the three can hold. If generalizable and simple, not accurate, if accurate and simple, not generalizable, and if generalizable and accurate, not simple. So, in the interest of understanding what a theory is in any domain, we might go lighter on Michael, regarding your criticism of mere accounting identities, which can serve to provide a very useful framework, which has some power for its simplicity and clarity; in the cloudy world of global economics. At least for its utility in provocation, which brought forth your discussions, at the very least.

      Since a large percentage of the discussion, is of savings, to look at savings, while discussing, what is merely assumed in much commentary, might be useful. Of course skipping domains, and attaching what is meant, or useful, is problematic, but of course, great discussion, on what is assumed, might require greater clarification itself.

      “The Chinese saving has been rising. Starting from an already high level of more than 30% of
      GDP in the early 1980s, China’s national saving rate rose to above 50% lately (Graph 1).
      Therefore, the marginal propensity to save reached 54% over the period of 1982–2008.
      China has seen three distinct phases in its saving rate – a steady increase from 30%–35% of
      GDP to 40%–45% between 1982 and 1994 followed by a decline to around 37% by 2000
      and a resurgence thereafter to reach over 50%. During this last phase, China’s saving rate
      on average went up two percentage points of GDP per year, implying a marginal propensity
      to save of 60%. “ (lower savings to higher)


      Look at page 5, look at timeframes, look at countries, their status (stages in development), and alterations in savings rates.

      So, you say household savings, but household savings is actually lower than India’s household savings, but household, government and corporate savings are all relatively high to peers (other economies), and the position of all three combined caused China to move from a nebt debtor to net creditor position in less than a decade. On this point alone, the discussion of China’s savings, as a function of its Confucian roots, as a cultural force, fails; both because of the change in a decade, and the fact that corporations and government savings are the deciding factors, unless these embody the culture. So, I think more importantly than focusing on whether Confucians were thought to be low savers in the past, and thus, such can not explain, high savings now, fails insofar as the data, relative to Michaels model, whether or not he fails to meet Sociological protocols ( I for one, am tired of Sociology’s attempt to colonize the entire academy, and all other arts and sciences, by the way).

      Anyway, most all the growth in savings, and unfortunately the data is only up to 2008, is not by households, but by corporates and government. Of course, after this point, China replicated the entire size of the US corporate banking system, and without searching out a source, we can assume this to be further toward the multi-decade trend, of storing up more of the national treasure in the hands of corporates and governments (an easy assumption, and while care need be taken, perhaps a useful one, similar to Michael, taking a step from Weber, and the writings of Confucius himself, if Confuciansism obtains to the matter at all, in describing the structural result of what is indicated, is essentially a low savings environment, especially where the pointedness and clarity of what is involved in a peer-reviewed journal is not required for us on this blog, although welcomed. Like stating the Japanese and South Korean cultural aversion to debt, not supported in the data, and seemingly very much a stereotype not born out in reality. If it previously held, due to previous position in the “development” cycle.)

      Please continue to give us lotsof of well thought-out insights.

      I far prefer your presentation than that of the singularity quants, cum libertarian ideologues. But then demand can not be created can it. If it can’t, then the world has a real problem, because global development depends on it, as does the commitment of important players, who supported a multi-lateral system that supported it thus far. I believe in this we both despair at less than free markets, no.

      BTW, are you a sociologist? A “marketeer”? A businessman? A labor union organizer? (all fine professions, btw)

      Oh, yeah, I think culture as an idea is BS, not just Confucianism; and especially neo-confucianism. An artificial notion only evolving post 19th century, and having grown as a thing (with way too much “thinginess” for all the Sociologists out there) after the Age of Nationalism (Bismarck) and largely infused with Revolutionary Ideologies (age of Revolution), sometimes even human senses (feeling, Age of Romanticism), that has been hyped in the Kantian way (Age of Idealism), that has become more confused in the last century (Political Ideological Confrontation{Capitalism-Socialism}, era of decolonization, counter-culture movements, Hollywood), and is largely a mass of internally, and externally, held conceptions that are often little more than stereotypes about oneself and others; sometimes even of the famed external other of nefarious intent. But, more specifically, culture portends to say too much (and Suvy and Mitra were miffed over Specialization and Diversity, Science, Art or Mathematics).

      • I don’t understand how you can think culture as an idea is BS. It’s a part of who you are whether you recognize it or not. It’s something you carry around with you everywhere you go and it’ll always be a part of you. Culture is, in some sense, just a transmission of information.

        • Because, the notion of culture is something that is used to explain far too much, and in this process becomes unuseful for doing anything, more generally. Because I have worked, lived, traveled to dozens of countries, and have always focused on how the similarity between people far surpasses any superficial differences (perhaps, this requires some adaptability, flexibility, and patience to be able to see beyond the obvious differences). Because I have read widely, and from a young age history, philosophy, religions, and then all the other issues I discuss. because I come from a “culture”, a place, that emphasizes individuality while also having had 85% of the people engage in volunteer activities last year (a strong balance between individual and group), to say nothing of hundreds of billions of dollars to non-profit causes. Because I have spent a live educating younger people (university aged people) in places around the globe, while sharing meals with people at all levels in all socieities in which I have lived. Where despite my individuality, there are two men living in my family home, where I live inter-generationally in the US, who had been homeless and are seeking work, a car, getting back on their feet. Both are unrelated to me, one i did not know before he arrived. Because, despite the fact that my family has resided in the US since the early 1700’s, perhaps because of it, I still hold these things that I feel, for myself, and require no other to support them (despite the post1960’s attempt to homogenize and pasteurize everything for everyone, and the decolonization era’s hope to use culture to build nationalisms of disparate peoples). Because in my expereince of the world, the best of people, which rarely changes from Central America to Europe, to the Middle East, Central Asia, South Asia, South East Asia and East Asia, rarely/does not change, but is often the very things accentuated as what is unique in each of these cultures (if some are more fond of saying We than I). because I have tended to live in places, and feel no special thrill in residing in any of these any more, just can and do, in fact even relish the differences, sights and sounds, way the thoughts, beliefs, ways and values are so similar, that I have to, seek out difference at this point. Because even the literature, let alone my empirical experience, is so weak, and contested, as you might add even mathematically, if not merely in their ideational construct validality that i find culture generally, as used, and believed, often by people with far less experience than me at experiencing different “cultures”, is, even, too often, detrimental.

          • If you’re saying that human nature doesn’t change, I completely agree with you, but different areas do have different geographies and need different living codes. The culture is just a different living code for that environment. Let me put it this way, do you speak to a person elder than you differently in China than you do in the US? That’s a cultural difference.

            Have you gone to parts of the world that’re heavily Islamic? If you just walk down the street in these areas, it’s a completely different atmosphere that’s very different from the atmosphere in most of the developed world. That’s a cultural difference.

            How can you say that those differences don’t exist? Is every part of the world the same in the behavior?

          • Speak to elder differently, no……
            One of my Asian friends, before father passed, would go to house, before saying hi to anyone else, say hi to him (friends father) and hi to his mother . Father would wave me to sit. Then would poor tea, and we would drink it. This is not done in his own country anymore, only at ceremonies (after/during political and business meetings)

            But differently, not in the least. Just because there are pronouns and grammars that obtain to use in speaking to elders, or even manner of speaking, and topics able to be spoken about, this does not change respect for elders, if Hollywood and Marketers hype youth.

            Actually, I have spent quite a bit of my time in my life, sitting with older people and talking. I often find they are the only ones with enough life experience, worth discussing things with; others are often too quick to an intellectual movement. But, of course, being old, does not make one wise, neither in China, nor in the “West”.

            But for that matter, not of a particular mans religion, I new a man who used to give “sermons”, I new he spent days on preparing these sermons, with his sacred texts, and legal pad, and sources, he would prepare for 3 days, before each, even though he had been doing it for 40 years, he still worked at it, so sometimes I would go and listen, even though a different religion then mine.

            And with other people, so on, and so forth.

            I once talked with a rather paranoid delusional Native American Indian women, she, well was quite balanced, was overly angstful at the world, sought her angst to be fulfilled in the realm of ideas, and sufferance. She stated, when white people come to our gatherings, and ask questions, my friends and I giggle, I tell them to go back to their elders, and learn from them.

            I myself rarely go to anyone to learn, and certainly hold Indians in neither esteem or disregard, but of course, for the women who said that, and for her people, or even for the necessary process she describes, I would have or need none of it. Someone with such an understanding, could never teach me a thing, let alone would I need merely go to an elder. Some of those who happen to be elders could teach me a great deal, some nothing, and others could equally giggle with ME at the notion.

            This is well recognized everywhere, even in places that (supposedly) RESPECT elders, as if the notions of Hollywood, insofar as these actually exist (in matters of disrespect, really, rather than immaterially), actually characterize the culture of a people.

            You know this is surprising. And counter to what one might think.
            I have spent time in 3 Muslim countries, and several others with Muslim minorities (airports, more, living one).

            In two, absolutely no difference whatsoever from their neighboring non-muslim countries. In the one I lived in, great difference, but socio-economically advanced.

            I was giving a lecture to women from the municipality in which I lived.
            Covered head to toe. Two men attending, also civil servants for chaparoning. They were administrators, lab scientists, lawyers, etc…
            One, in the middle of a series of lectures spoke up, and said to me, “So, what do you think about XXXXXX women”. I said, uhmmm, what do you mean? She said do you think they are attractive. I said, Uhhh, ahhhh, uhhhmmmm, I….I ….I think all women are beautiful.” Another women said, “She means, what do you think of her?” I didn’t answer, in her case, she was also, really, attractive. Actually, the mix of peoples and races, are normally, generally, far more attractive for their unique features. Anyway, the men didn’t jump to their feet, the other women didn’t gasp, laughed, and giggled, as anywhere were such a question to be posed in a large gathering. Actually, i think the men, understood my discomfort. This is because I was actually surprised due to my preconceptions.

            So, I did not say that there are not differences, there are even greater differences between individuals, but these are often more stylized and idealized then real. Unless a small group will chop of your head, if you don’t follow the mandatory ways. Which of course, other than my belief and experience, is why I discuss as i do, in regard to nationalism and ideologies, and stereotypes.

  34. ^^ Michael Pettis WROTE: “Historically whenever global demand is weak, and unemployment high, countries will try to gain a larger share of that demand….”

    In this blog, Michael examines sources of GDP growth from the DEMAND-side. Michael’s insightful demand-side analysis has uncovered enormous problems with imbalances in Asian, European & North American economies.

    His DEMAND-side thesis, however, does not say much about the Latin American and Sub-Saharan African economies. They seem more or less balanced from the demand-side. So are they home free? Should they be patting themselves on the back for having avoided the demand-side imbalance problems Michael has exposed?

    Interestingly enough, when we do a complementary SUPPLY-side analysis, the position completely reverses. The Asian, European & North American economies seem more or less normal from the SUPPLY-side. It is the Latin American and Sub-Saharan economies that reveal MASSIVE problems when examined from the supply-side.

    Since this is a tangent to Michael’s DEMAND-side research, and would just clutter-up his blog if I posted it here, I have put up the complementary SUPPLY-side analysis online separately. This may be of interest to all the regular blog participants here, and ESPECIALLY so to readers who may have an interest in Latin America and/or Sub-Saharan Africa. Here it is:


    • In this blog, Michael has explained the Japanese ‘lost-decade’ from the DEMAND-side. Michael’s analysis has provided clear insight into Japan’s growing imbalances in the 80s, its efforts to correct those imbalances (i.e. ‘rebalance’) in the 90s, and the resulting stagnation in Japan that was but a necessary consequence of this rebalancing.

      However, his rigorous DEMAND-side research does not shed much light on the famous “Two Japanese Puzzles”:
      (1) Why was the Japanese ‘lost-decade’ in the 1990s LESS PAINFUL than the Latin-American one in the 1980s?
      (2) Why is it that more than 20-years after the collapse of its bubble, Japan has STILL NOT been able to recover?

      Interestingly enough, a complementary SUPPLY-side analysis does shed some light on these two key questions about Japan.

      Given that a SUPPLY-side analysis is a tangent to Michael’s DEMAND-side research and would just clutter-up his blog if I posted it here, I have put up the complementary analysis online separately. Here it is:


      This may be of interest to all the regular blog participants here, and ESPECIALLY so to readers who may have an interest in Japan and/or Latin-America.

    • In this blog, Michael has clearly explained the upcoming Chinese “long-landing” in terms of a growth slow-down while China goes through the process of ‘rebalancing’.

      Michael’s DEMAND-side research has provided clear insight into the origins of China’s growing imbalances, and suggests that China must correct these imbalances (i.e. rebalance) soon in order to avoid a debt-crisis. Michael’s research also shows that slower future GDP growth in China will be a necessary consequence of this rebalancing.

      It is interesting that when East-Asia is examined from the SUPPLY-side, everything that Michael has forecast for China from his DEMAND-side analysis seems to be JUST AS TRUE for KOREA.

      To see why, a complementary SUPPLY-side analysis is necessary. Given that a SUPPLY-side analysis would be a tangent to Michael’s DEMAND-side research and would just clutter-up his blog if I posted it here, I have put up the complementary analysis online separately. Here it is:


      This may be of interest to all the regular blog participants here, and ESPECIALLY so to readers who may have an interest in Korea, Japan and/or East-Asia in general.

  35. Do I have this right? After 1/2 a mile of comments and a weeks worth of vituperation, you believe that Pettis would spend time arguing about: “. . .cultural values are not in some form influencing economics”??

  36. Ok, I understand. The professors students come here to defend the professor. Clap clap – I resepct your respect for your professor. Rest assured I share it. Doesn’t mean I can’t argue against some of what he says. csteven and DvD are obviously not in this category. Thank you for both your criticism and compliments. Yes, I do write from work, while working, and I dont have the space and time to focus what I write…sorry.

    I find some of these students remarks, that I am guilty of the same arrogance as the professor entirely appropriate, but I’m totally honest about it, and wont be a hypocrite. Yes, I’m arguing somethign different from the professor. What I dont agree with is the point that I am guilty of the smae close-mindedness. By saying that there is no feasible scenario the professor is willing to accept to allow for a cutlural argument I mean it. It’s unfair to throw the same at me, as some kindergarden answer. If someone makes theri hypothesis not falsifiable, that means that hypothesis cannot be falsified and there is no room for argument. If you read whta I wrote, at what point is my stand dismissive of economic explenations? At whta point did I not leave room for sociology and economics? You’re assuming that I’m assuming that cultuer is not somehow linked to either economics or sociology. Its the wrotn assumption about my assumption. At some level, economics and sociolgy are cultural, just as all economics and culture are sociology, and vice versa. Just as the professor has class biases, so we have them all. Yes, I have them, but I am perhaps more formally aware of them than the professor. So that I am also keenly awaqer of my own arrogance, which I dare say the professor is not. If you take me to taks for somehing I take for granted, I will be just as upset…but eventually, I’ll be forced to listen to you simply because no one gets a free pass. It’s when we are glib, that we are most often wrong. Granted for the professors analysis, cultuer sould not professionally matter. If it was not linked to a class bias against those for whom it matters, then it would be irrelevant. The trouble is, tihs whole debate matters a lot more to the professor than he cares to admit, since it undermines his business/accounting/economist approach of wanting to mechani9cally explain the world. This is why I keep in jabbing back with details. The details of savings instruments, businss cycle sychronisation, and currency regimes. If all was as simple as the professors abastarc model suggets, he would be advising Obama, and not Brad Setser. His model is too abstract, and reified, hence very very coherent. In philosophy of science we are all more or less aware what a “whore” coherence can be. Watch out for coherence, stick to demostrable facts and common sense. Professors often lose touch with the “base” and confuse their their ivory tower vision of the world, with the world itself. I dare say judging by the variety of perceptions we all have of the world, any confusion of our own personal realities with a greater reality, can be very misleading. This applies to me as much as to the professor as much as to anyone esle.

    @Vinezi Karim
    I read your comment and the details of your discussion on the supply side. It made me think, but then I concluded that it was too wordy. You’re basically saying demographics erases productivity gains…I think we basically all understand the arithmetic of declining population, i.e. for two geezers you got one youn’one and this presumes doubling of productivity gains to maintain growth. So I fail to understand the “supply side” of what you are suggseting.

    I want to come back to one point. My colleague, who for reasons of observance (Yamim Noraim) refuses to post for the next few days, posted a comment on this blog describing how the professor’s glib remark that america’s blacks do not receive a favorable share of public moneys, is absolute nonsense (this was my colleagues opinion). The comment never showed up, replaced by a note from the professor, ni ni na blah blah, in sum “I censor your commments”. I happened to consider my colleagues cmoment legit. I dont understand why the professor chose not to post it. America’s blacks have traditionally been beneficieries of greater investment than any other group in the staets.

    Back to confucianism.

    First, the debate was “why ain’t they ca-pi-ta-list”

    then with Baran and Sweney it was “why ain’t they really socialist”

    Today we’re conflating this with “why are they doint so well.”

    All along the question is/was, do cultural values predispose some nations towards economic growth, decline, capitalism, socialism, industrialisation. The professor says “ah, these silly economics, one day China can’t grow because its confucian, another day it grows becuase its confucian” and then outlines 10 logical scenarios which all make it impossible for culture to have the slightest impact on economic regression or growth.

    I maintain categorailly that culture is a driver of all economics. In asia, calling it confucian is a misnomer.

    Forget island states created by the British. South Korea’s growth and Japans, confucianism?

    I would avoid this term for a simple reason. Between today, and 1900 East Asia underwent so many revolutions. Including reforms in China, internal reforms, very well thought out by the Chinese, with Chinese culture in mind.

    So lets tidy up here.

    When we speak of savings, we speak of households, national, and capital formation.

    Household savings can be measured in a variety of ways. My argument assumes that Chinese household savings are represented in the only savings instrument available to the Chinese – empty apartments. The Chinese leadership coudl ask itself. Why do we lack financial products for household savings? Why do our people only have one choice where to plow their money – housing? So I would say “becuase you can’t get over your confucian attitude. You have no sense for economics. You only understand face, stability, and work. It’s a peasant mentality. You work hard, and you eat fast, and you do your acupuncture and tai chi, so you even manage to live to a good ripe age, but you dont have a feel for life itself. You follow route learning. Everything is prefab for you. Your values never changed. China is the world center. Your culture is your only reference. You’re painfully inward looking, and the idea of mixing with others, opening up, etc, is foreign to you. You remain natioanlist throughout, with your idea of the nation changing based on politics, but the fundamental aspect, remains to dear for you to change. In the end, even when you get things going, as Weber pointed out, as countless sociologist spointed out, your only grasp of economics is “buy property” as it was under the Han dynasty!”

    Fastidious, hard working, and you can talk all the econ you want, you wont change the above description. No, you dont need a Phd to get it. Am I saying “the chinese save becuase of confucianism”? I am not sure. I think I’m saying “they are sticking to a script, they dont know how to get off it”. What I was upset about, was the claim that anyone at any point had misread confucianism as being profligate. This was BS, and it wwas jsut one of many points. I think I’m giving a much more nuanced answer – I’m saying that they only have one investment insturment at the household level, or really three, as I said, loan sharking and education also count. You can make what you want out of this. You dont want to see the cultural link, its a qusetion of open-mindedness.

    The Indians? CKorean? The Koreans are obviuosly different. First, I am not suggesting that savings is a proclivity of merely confucianism. I am not even sure I ever said this, since what is scholarly identified as confucianism isn’t savings, but frugality, and real estate investment. Second, if the professor wants to substitute developmental stages for culture, then it’s precisely the sort of sophistry that preempts any possible scenario in which cyulture counts. Of course developmetnal stages are related to whether or not a nation saves! Of course you dont have to call this culture, but in that case, what do you call culture? Ini that case culture as such does not exist. Hence, my real question to the professo should be, if culture doesn’t matter than “what is culture”. Define it. Define whta you mean by culture. Naturlaly your definition will be such that whatever you chose to define as culture, will in no way be identifiably linked to ecoomic activity. Right?

    Again, comon sense, as someone pointed out Islamic banking is an example, tells you that an average defintion of culture, not one tailored against economcis activyt, will allow room for some relationship with economic behavior.

    I find it hard to swallow that Japanese, koreans, and chinese may all be frugal due to “confucianism”..again, because I would relaly like to stick to Confucianism in the Chinese context, and not outeside, in areas where it is not clear what its application would have been. I mean let the historians or those knowledgable in the filed make these staetments, based on research. I never studied Korean history and most Koreans I knew were not even capable of sharing their hsitory with me, leaving me with the imerssion that they were very ahistorical, their ideas about teh world much more shaped by the last 50 years than any deep historical roots. I mean is it COnfucianism in South East Asia, or is it American money and tutelage touching on Taiwan, South Korea, Japan, and partly Singapore? I dont hvae the answer. So I stick to CHina. I’m not about to generalise about thigns I have too little information about.

    The German case adn that of Spain strikes me as emintnely more accessible. If the professor want the argument that Germany’s negotiated wage cap, negotiated democratically withign a robust institional framework, in no transgression of WTO rules, automaatically led to Germany’s export of capital to the periphery, then all he needs is to outline in detail, as Roubini used to do, the transission mechanism. He seems to dismiss details as irrelevant. Sure – when you have a reified model which by the way predicted and predicts nothing (for those so found of nagging economics for having failed to “predict” the crash), in which everything we see is easily explained by accounting identies, who needs details, right!?

    Wrong. Wrong wrong. Before you say culture does not matter, show me the transmission mechanism?

    What happens when you do (and for those who hate long comments, forgive me, but how else do you want me to make this point?? go ahead and summarise it yourselves then. I am not capable of being more succinct, sorry) look at details?

    Ahhh. Well here you get into all kinds of details. Like instition type, loan type (i.e. capital category). find that German banks were in no way the dominant lenders in Europe. They were not the capital exporters in any sense of the word. The main lenders were the UK, This is why I would say, dear professor, provide culture does not matter, then what word do you use to explain to us why Germans dont own homes, but rent, why they have half of the banks of the EU, meamning these bansk are not the biggest, but very dynamic and regional, why Austriaqns (germanic speakerS) are the same? Why the big consolidated banks are in France and UK, where savings are lower and where banks rely on different instruments for interbank loans? According to Pettis, Germany flooded the periphery with capital, and he’s suggesting loans. Right or wrong?

    This is just not factually true. When the facts dont correspond to your thesis, then what does a profsesor do? Drum on about the thesis!?

    Germany had capital exports in the form of investments both portfolio and FSDI in the east. Not in the south or north, or west. It created a massive industrial supply chain in Central adn Eastern eruope, largely in the 90s. Yes, professor looks at balance sheet…but we all now understnad that speakign of cpaital exports, you are not speakign of capital exports, but of exports as such. You’re talking about Germany’s export sector being too competitive for that of the periphery, becuase the wage cap prevented wage inflation which would hvae allowed Spain to remain competitive.

    HOw, if not using culture, can you explain that Germany coudl ever instituet wage caps?

    Note the diference between China and Germany. In GErmahy we’re talking robust institutions, in China we’re talking about massive manipulation, with total lack of institutions, using sterilisation, subsidies from inland taxation for coastline developments, financial regression, lack of convertabiilty, closed capital accounts – bottom line, not a market economy, but more of a magic trick. David Coperfield of sorts, with Wwestern companies benefitting from Beijing subsidies of all externalities. Why are you so sure then professor that in speaking of Germany and China, we’re describing the same thing? Because balance sheet shows us this? The difference is that China grew becasu fo massive internal wealth-transfers, and outright manipulation of the monetary base, not being a market economy. Germany negotiated in classical ordoliberal fashion the need to homogenise wages accross a unified GDR and FRG, taking into account future supply chains in central europe. With the good manufactured in this context, Germany next flooded the periphery, and this destroyed peripheral industry.

    Ok, let’s assume this is all true. What was Germany supposed to do? What was the other possible scenario. IMagine that for domestic reasons, FRG does not negotitae with GDR on wage rates> Everyone assumes that capital goes East (magically, as if capital was a question of a weathermap and isotherms). What kind of effect does this exert on german wages? Is a new federal germany supposed to deflate becasu of GDR or inflate because of FRG? Its rather obviously the former, since 10 million workers added to an economy of 30 million will outweight the oposite trend.

    Voila professor, your wage cap.

    Let’s imagine the opposite however, let’s imagine that for whatever reasons, Germany inflates, and the PIGS are somehow competitive. First, those who love to generalise, I don’t. I dont like imaginign Greece doing anything of the sort Spain did. Nor Portugal. Spain and Italy had set up competitive automotive industy, wtih the help of American capital, which one can imagine benefiting in a scenario with inflating Germany. Greece, Porgutal? Not a chance. Tying their economic performance to that of GErmany, is a huge stretch. Italy coincidentally always does well in its industrial zones arount the VEnetto and Genoa, i.e. Ligurian sea. So Germany inflates, and the Spanish automotive sector dose what? Does it take off and instead of remaining stagnant as it has int he last 10 years, it doubles, leading forward an industrialisation of Spain, while Germany stagnates? Yes, imagine how a democratically elected government in GErmanyw ill do if Bonn, er Berlin says ” hey Krautz, we gotta let Juan keep a job, so you know, buy Seats…”

    There you have it professor. You think its all balance sheet, and it isn’t, its basic industrial policy. There was no ponit at which the competition wasn’t for jobs. IT was always about jobs. From day one. It was about internal German jobs, and Spanish jobs, and youi’re sayign “those Spaniards were taken for a ride with teh Euro…if they had maintined their Peseta, well they could have hit back at the Germans with deflation and rendered their Seats and Fords and GMs competitive…” (Opel is tough, right? dealing with a German manufacturer in Spain?…but then who was Seat owned by? Good old Wauxhauls or whatever else the flamencos had…). Agian, never mind the complexity of what happens in the case of a transnational corporation reexporting from Spain into the home country. While we are at it professor, why is it that Renault has no problems opening up factories in Algeria, while Spain stagnates? Is that also the Euro’s fault? but but but to stick to the point here, so Spain deflates its peseta, and its Seats and Opels are as affordable as Germany’s VW because the Deutche Mark is now overvalued due to an undervalued pesseta.

    First, of all people you should recall what the ERM was. How damn complicated it was. 1979 it was introduced right? How do you imagine Spain could have in any way deflated the pesseta in the ERM? How? Do you now want to go back and tweek your argument to say “oh, if not for the Euro and the Pesseta”??

    What are the details by which you imagine Spain capable of manipulating the pesseta?

    I stop here, because there is work, and this is enough fro anyone to chew on. To me the details reveal a lot about what one could call structural differences, which in my mind can also be summarised as cultural differences. Am I suggesting the Greeks and Spaniards should have saved more? Yes. Culturally they should have saved a lot more.

    Just as the Chinese should have introduced market reform. Oh, but culture. Culture. It’s a straighjacket. It requires institutions, sociology, economics, attitudes, beliefs. and we all know how unimportant beliefs are to economic behavior…like the belief in confucian values and real estate markets or the belief in the importance of markets -w hich the Chiense absolutely do not have, but oh my, why would that be? Let’s go back to Weber and Baran shall we?

    • Perplexed

      I think you will win no admirers by labeling others Michael’s students; actually I am not sure even one posts to this site (insofar as those who Michael is paid to teach).

      With that said, in a Middle Ages way, a renaissance way, in a marketplace of ideas, I would say that I am a student of Michaels, and perhaps others here, who receive his newsletters, or pay for access to the different groups that he works for, even while paying, if their ego’s are not misdirected, might even say that they are his students. For many of us who continue to educate, self-educate insofar as i pay no one for the knowledge I gain, and receive no paper for it, in many ways many of us could consider ourselves Michael s students. because, rightly or wrongly, insofar as his models and perspectives, he has provided many of us a new, and thankfully, quite useful framework for reviewing the global economy.

      I have a decidedly development perspective (how could one have a free market perspective, when markets aren’t free), so this can be considered an internationalist, but only by default, and I have no interest in merely supporting investment bank interests to the detriment of my neighbors children (I have none to consider). But in the way of monks, on this disintermediated, asynchronous exchange of ideas, which has people come and review, because of Michael, and the typically better level of commentary, where we discuss these issues in terms of the dynamics and frameworks, and definitions that Michael provides, as if we were electronic monks from the middle ages, and in the original sense of the word student, i might say that we are Michaels students. And this is in no way hooraying Michael, or deriding ourselves, because the ideas that stem, and analysis that is provided comes through Michael and he shares with us and we back; thus experience is had, and we, inevitably influence each other to greater or lessor degrees, despite the over-riding power of genetics, or the strength of our personal beliefs, much less our group values.

    • Perplexed

      I would Suggest the following book, heavy and time-confusing, but might wipe away a vast array of your too easily had assumptions:

      Univ of Pennsylvania; Randall Collins, the Sociology of Philosophy, on how intellectual dialogues in all ossified cultural ways, have altered, ebbed and flowed throughout their histories, with specific reference, to the how dialogues changed, the different intellectual philosophical movements, across all geographies, globally, and very detailed, a tour de force. No one could walk away from such, with an understanding of the “Type” “Way” that has transcended “time”, and does “X, Y, and Z”.

      The one sociological text I like; God the preferred intrusion of as practice into everything, and stifling dwindling of all academia into necessary terms around such, as if to kill all art and science at the hands of these sociological monsters would be depressing if one were to follow it too closely. Where we might be closer on the Judeo-Christian grounds of I do this as you, but I admit it, introducing a necessary subjectivity stemming from the put yourself in others shoes ethos, to make everything of this, while simultaneously heightening a group thing that we are all subject to necessarily is both schyzophrenic and maddening for its ultimately untenable nature.

      I can see the more neo-darwinian jaded realpolitck-charactered people out there giggling at the naivete as they configure themselves to reach some sociopath(et)ic end or another.


  37. Even in a well-managed blog you will find idiot persons and, like Mr. Pettis I think, I am very arrogant to waste my time on idiots, but I am also very angry that you have taken advantage of the courtesy he provides to accuse Mr. Pettis of censoring his blog. This is why I will answer your comment.

    You imply that if a reader makes a comment that is so upsetting to the economic and political beliefs of Mr. Pettis, that he will censor it rather than allow anyone to read it. You then said that there is a specific comment, known to you and to him, which proves that he censors such material and that he hadn’t the integrity to reveal.

    I assumed that you and your friend said something very stupid but did not understand that it was merely offensive, or trivial. I never thought that you would reveal this profound truth that has overwhelmed the edifice of Mr. Pettis’s work. But here is what you say:

    “My colleague…posted a comment on this blog describing how the professor’s glib remark that america’s blacks do not receive a favorable share of public moneys, is absolute nonsense (this was my colleagues opinion). The comment never showed up, replaced by a note from the professor, ni ni na blah blah, in sum “I censor your commments”. I happened to consider my colleagues cmoment legit. I dont understand why the professor chose not to post it. America’s blacks have traditionally been beneficieries of greater investment than any other group in the staets.”

    When I read this I could not believe that even a racist and idiot could believe that this is the great truth that Mr Pettis cannot face. Is it really possible that even someone like you, whose grammar, logical and writing reveals a low quality of education, believes that Mr. Pettis has censored this comment because it is a disturbing truth?

    Let all of us pretend, for just a moment, that it is possible that you are right to say “America’s blacks have traditionally been beneficieries of greater investment than any other group in the staets” (I must apologize for the spelling and grammar but it is a direct quote). Let us also pretend with you that slavery, Jim Crow, higher jail rates for the same crime, lower education access, and many other things, are not part of investment.

    So please you do not need to defend this statement. I will fully grant you your premise. Here is my question:

    Do you really believe that Mr. Pettis censored this profound truth was because he was unable or afraid to respond, or that it was a shock to his intellectual framework, and he could not allow anyone to see it? Are these statements not commonplace enough that he might have heard it before?

    Do you think there is no possibility that he censored it because it was irrelevant to the debate, or foolish, or contemptible? To make the accusation you made, you must be very sure that he didn’t censor it for the reasons he said, which include stupidity and/or merely faith based. You are absolutely certain that these could not have been the reasons?
    Please understand. I am not disputing the truth of your friend’s statement. Of course you and I will profoundly disagree on the level of its idiocy. I am simply wondering why you have said that this proves that Mr. Pettis censors arguments that are too difficult for him to contemplate because they undermine his arguments. He has allowed you to make such an accusation on his blog, and it seems to me a grave accusation that can only be justified if you think it is true, that he would not be capable of responding.

    • Dear Juan,

      In the countries I cmoe from, and the traditions most of the people I associate with, the word “censorship” has no positive connotation. When you grow-up and understand that, you can get back to me.

    • Juan

      Blacks and Social Benefits; Yes and No.

      Absolutely: blacks have not accessed more social benefits than whites because there are 6 to 7 times as many whites as blacks in the US;, even today (and we have a half-Black President, food for thought. ) (I always giggle when I see Iranian, Venezuelan, Russian, North Korean and Cuban satellite tv of black and white footage that is far older than myself, and of course even more distant than any of our realities.

      Proportionally: Yes, blacks have used more than whites on a proportional basis, but then urban dwellers, where the bulk of blacks still reside, use proportionally more benefits than suburban and rural dwellers, as one could easily imagine.

      While an independent myself, basic republican critiques, and many african american scholar, critiques that desegregation and similar failed is true. Although the long term impact is unknown. The short to medium is obvious. Only the rich blacks left the cities that were failing, where many have revitalized, as the neighborhood doctor, lawyer, accountant, grocery store owner, restaurant owner, mortuarist, insurance salesman, teacher, policeman, fireman, and so forth, left the neighborhoods and the neighborhoods subsided further after white flight to newly created suburbs, due to the inordinate revolutionary and zealous notions promulgated by social critiques at the time. Some reversal of these dynamics has been occuring for decades at this point, after the destruction that occured even further in the past than that. of course Hollywood is always retro-ing these ideas for its emotional content, and for cheap sales, of even cheaper beliefs.

      Now, I agree that Perplexed need to make statements in a less careless and ideological, cum stereotypical, way for his messages to be able to be considered by most of us, raised in post-modernity, a force of which many posters, as Perplexed, suffer from themselves, more than I, but of course that could be dismissed as arrogant, but of course, I am more fun-loving than merely abrasive, even if the notions I just propounded, are abhorrent to the preferred delusions, of many of today’s current thinkers. Which I think are too often wasting their time in the past, then the present and future.

      It is instructive that of book sales, History is the most popular. Of histories, biographies of the most popular, of biography, the biographies of those who have transcended great distances, 0overcome great obstacles, of course this please the psycho-social nature of many humans, in reading these for our unresolved loves and losses, and for others of a far deeper demon, a paranoia, upon which our very existences are impugned by another, by others. I am glad many children, black, white, green, male, female, mixed whatever, tall short, thin fat, with parents without parents, with addictions and freedoms, with our without obesessions or compulsions, impulsions, clear and faulty thinking, have in Obama, an example, that serves counter, to the basest and most maligned of their, and others, muddled thinking that only, too often, serves the case of disempowerment itself, and works against personal character building and achievement.

    • Perplexed

      On Germany, not sure where your thoughts are to German success, but you might want to read the following, and I should say, insofar as it matters, and I don’t believe it does, i, as most Americans, have German blood, actually this group would be the single largest provider of blood to the US people, so, for what that is worth, just so you do not assume I have it in for the Germans, as I don’t, nor do I have it in for anyone (despite the quick paranoid nationalist response of too many, who have too quickly become paranoid nationalists in their intellectual development), but here:


  38. PerplexedReader I don’t normally comment but you are making accusations that are so dishonest and stupid and that show such a lack or respect that it all reflects very poorly on your intelligence and integrity. I know Professor Pettis well (not personally) because we are both on a listserv community of over 1000 China specialists, including very well-known academics, bankers, and government officials. I can say that he has absolutely no reluctance to take on some of the most brilliant people in the field. His debates are invariably courteous, but while many debates on the listserv quickly degenerate, I, and many others, have noted that he never continues when the debate threatens to become silly, abusive, or childish. Pettis has no problem with debating incredibly smart people, but he seems to lose all interest when the debate or debater degenerates below some level. Maybe this is what you meant when you implied that he is arrogant.

    So either he hasn’t responded to you because your level of intelligence is so far beyond that of anyone he has ever had to face, or because he thinks your comments are incoherent, muddled, and/or petty. Either is possible I imagine.

    But in helping you to decide which is more likely, notice how you have backed away from every statement where others have challenged you. After thousands and thousands of words, your argument boils down to one triumphant claim, which is that Pettis is wrong to say that culture has no absolutely no effect on economics, institutions, politics, or anything else

    But don’t strut too quickly to collect your prize. John Person has pointed out that Pettis has never made this claim, and he even says that no sane person would ever make such a claim. He seems to be saying that the claim is too stupid for anyone to take seriously, or almost anyone.

    Dan Berg expresses surprise that you believe that this is what Pettis said. Do you understand why he is surprised? Is it possible that Pettis has ignored you not because of your brilliance?

    By the way you will easily find that Pettis has publicly engaged in debates for Bloomberg and the Wall Street Journal with the likes of leading scholars like Nicholas Lardy and Eswar Prasad. What kind of self-delusion leads you to think that he will disagree and debate with such brilliant scholars in such public fora, but on his own blog you have managed to intimidate him? I don’t want to be rude, but after trying to read your comments I’ve decided that based on the incomprehensibility of your writing even if he wanted to disagree with you he wouldn’t know where to begin. I am not kidding. Your writing is truly an intellectual mess.

    I probably shouldn’t post this because it merely adds wood to the fire, doesn’t it? I have met people like you and the more your intelligence is questioned the more you tell yourself that you are a lone genius fighting the mobs, (but you never really believe it, do you, which is why you will respond with another three thousand words of muddled, confused, attempts to be smart)

    By the way, after reading your summary of your friend’s comment I think I understand why it was censored and I am pretty sure the problem was not that it was too shocking to be allowed to see the light of day. I am also pretty certain that only in very limited circles would it be considered impossible to answer or refute. Without making certain allowances for IQ and educational level, it is hard to see why you think it significant that Pettis didn’t approve it.

    • Well, I’m very happy to see that once credibility is at stake, and class prejudices, even listserve can spring into action. Good to see liserve ios open to amateurs and doesn’t have any class prejduice.

      Defending censorship of a comment you’ve never laid eyes on. So you’re a student, listserve, groupie, and hysterical?

      Who has demonstrated that the professor never made the statement I attributed to him? Excuse me? I quoted him directly.

      No, you dont add wood to any fire. Just whinning to the whinning chorus, because besides the reputation costs, which are so far limited to only a team of ten international bankers, and don’t worry, we didn’t record the comment so this isn’t going to go anywhere beyond this roll of comments, the commentators here whose knee-jerk reaction is to whine, snort, and cry like little babies, says something about certain insecurities. It is a bit of a puzzle why there are so many whinners here. Maybe we should do some kind of balance sheet analysis of whinners to critics.

      I repeated numerously that we all respect the professors work. Your obession with telling others whether or not they are polite, courteous, or within the limits, is about as high-brow as your judgmetn of comments you can’t even read because they were censored.

      A healthy reminder all of this of how the pretext of objective science is inevitably about nothing but egos, reputation, and hysteria.

  39. @Perplexed say ” The professors students come here to defend the professor. ”

    this totally unfair. I was student of Pettis a few years back. small seminar. he make us all ask question, talk, debate. we doesn’t mean we all obeyed the professor and were starry-eye. I myself not a big fan, because like you I find professor not sufficiently understand Chinese culture, you are wrong to say we are all his students and defend him. His economics is super great. He much better than you in this. You make wrong statements. Chinese culture not rigid. Changing must and a lot make.

    I not defend professor. I defend Chinese culture, and professor economics. You wrong see contradiction.

    • So you’re saying Mr. Ning, that Mr. Pettis “not sufficiently understand Chiense culture”


      Gee whiz, isn’t that what I am saying!!??

      and by the way, my respect for the professor’s economics is total. I adulate him. Doesn’t mean I jump off a cliff for him, cuz I think coherence is a “whore”. It’s not the professors duty to convince me, or anyone else. Let him stick to his guns. I just totally disagree with him because not only do I think he doesn’t understand Chinese culture, but more importantly he doesnt’ understand his own culture. I would be the first to say, Americans are so insular. What I said above was that yes, Americans are insular, this is American culture. No really, it is. Cul-ture. If Pettis is saying this, he is making a serious cultural statement. Saying a nation is insular (not putting words in your mouth professor, but its what you said) is a judgment about culture. I share this judment. I added to it by saying “but professor, outside of America, there are no international economic historians of any note or worth. Who else writes internatioal economic history? Only we do.”

      And here, let me challange my whinny groupies again – today you learned who Kindelberger is. Can you please name a few others? Especially foreigners? No no no. Not Weber, he is a sociologist, I assure you. If you dont understand that, then you never took sociology or economics. Its as simple as that. He has things to say about economics, but he is not an economist. His conteporary Bom-Bawerk or William Jevons (who you all no doubt know by heart – ha!) were economists. Please please understand the difference between sociology and economics, please. Because I dare say that while Mr. Pettis is multi-schmulti, I doubt he spakeas any other language or fi he does, has ever read in another lanague not just economic history, but let’s say even a mainstream historian from another country? Because you know, here he was boasting of his international backroud. Now I know this sounds like a terrible personal insult. Stop right there you thin-skinned whinners whose mention of IQs is a cry of insecurity, I have a very very serious point to make with my question. Namely, you no doubt know Professor that in today’s academia, many a foreign student comes to America, or to prestigious univeritise in Singapore and wherenot. More often than not, these students are exposed to a curriculum 99% form America and the West. Doesn’t matter where they are or where from, they literally get brainwashed into a curriculum that doesnt’ include any coutnry’s contribution to our history or economics, other than from America and the UK. If they get lucky, they will read Kindelberger, and economic history as such is an elective, and in any case its US centric, right, or in the UK case, a bit centered on the commonwealth. So while you have read Kindelberger, and you and I both agre thank the Almighty for Kindelberger in teh context you cited, let’s broaden the argument a bit more and say – isn’t it a pitty that we don’t include other country’s Kindelbergers. If so, should we then perhaps not be proud that we at least in America have a Kindelbeger? I mean I am being a bit ironic, but you do realise that you can’t cite anyone else but Kindelberger, so we still end up being quite quite ignorant, aren’t we? Yes we are, all of us. None of us can name another country’s Kindelberger. That tells us all something.

      Professor, rest assured I love your work. I read it very attentively and religiously. You and many others. Whenever time permits. I absolutely dont care if you take the time of day to address me or read my comments. I can cite you from many yeasr back. This is why I have things to say, even if you find them silly. I did not discover you yesterday. So please dont take anything I say badly. Unlike some of yoru reaers here, I assure you that there is a big difference between bad manners and bad intentions and I honestly will respect you if you dont conflate the two in my case.

      My only wish was that you elaborate more the detais of transmission mechanisms. I was serious about my questions about Germany. Again, I do not care if you read it or do not answer. You always post awesome stuff and I always read it.

      If I have any explicit agenda its to get you to tone down on Germanophobia. This is where all my personal angst about your work started, when you translated the Chiense model to the German/Spanish and started this whole Emanuel Todd attack on Germany. The mechanisms in Germany and China were not the same and I regret not being able to convince you of this. I think it leads to really serious failure to diagnose the problem in the EU, and yes it makes me more careful about what you say about China.

      • Perplexed, these bland and blanket assertions do not help your case….
        the finality in your statements undermines it….

        For example Economic History
        Lund in Sweden, off the top of my head, but of course more widely, and economic history is now returning to the US economics teaching….If there are many worthy academics, many historians rather than economists who have taken on the topic, and published very interesting books.

        • Lund in Sweden specialises in Business history if I am not mistaken. It is almost and nearly unrelated to economic history. I mean for x-sake just mention Niall Ferguson or something. I am surprised no one reads him. Yes, its popular economic history, but give the guy a break.

          Randall Collins wrote an intersting network theory of sociology. In university we all learn to read critical revies and academic articles. It’s not serious to take some guy out of context and start using him as an example of anything.

          • Speaking of Niall Ferguson, here is a controversial article that reviews his work……


            The somewhat-long article is FOLLOWED by an EVEN MORE interesting MANO-A-MANO debate in the comments (or ‘letters’) section at the bottom of the page. It’s fascinating: Ferguson demands an apology. No apologies is given; instead more attacks are made. Demands for apologies are repeated. It seems to be thrust & parry; advance & retreat all around. Lots of masala for everyone. Enjoy with cool glass of water.

      • Brainwashed into a curriculum…..no, no, no, excuse me very directly for disagreeing with your characterization of what I do…

        They get, please do not tell me what you think the right answer is, or what you think, i think the right answer is….why?

        rather, selfishly i might add, the last thing i want to do, while marking 200 exams, is read, the patterned answers that the students got together and shared from one of the better students, who they respected and thought would have the “best” answer. Rther, please tell me what you think, where I will not judge it by what i think, or by what contradictory literature thinks, but by how well you can state, support, refute, and support the re-statement of the strength of your position, regardless if there are glaring mistakes, from the preferred perspective of myself, insofar as where I sit in the great mass of oft contradictory literatures.

        God, how I smile, when they give me, an oh yeah moment, please do not mischaracterize from a decidely narrow frame to support your darwinian noise of the essential segmentation of humans, into great mass of necessary difference, when even, genetically, we are 99.7% or higher, the same. Sure mountain people may have shorter legs and be able to scale mountains easier, ocean-ound people another, but this is not universally, inevitably so.

        if you read Collins for example, you will see no Confuciansim, or Hinduism, you will see the many schools, who down through the millenia have impacted what Confucianism and Hinduism are, often on the very same philosophical topics, that have occupied the minds of western philosophers. You may want to accept the post 1960’s pseudo spiritual notion that the Western mind is ruled by the writings of Descartes, but of course, such linear extrapolations, are often of so little value. Similar, there is not a Hinduism, or Confucianism that has existed for any length of period, as such, they are as rich, and varied, and changing, and contradictory as Western philosophy. Only thing is, most people, especially nationalists, are very ignorant of that matter. Better tools, are the masses that way.

  40. I believe that PerplexedReader is not crazy, but some of you Juan and Xavier are very strange. I disagree very strongly with Mr. Pettis’ reading of India, and I think he distorts what BJP and Naranda Modi represent. I think he distorts what Le Pen represents. I totally agree with PerplexedReader’s comment that economists despise common people and never listen to them. Here in India we have so many economists who attack the BJP for being nationalist, but everywhere you look you see that nationalism helpes countries grow. The West is not our model. The West grew not thanks to economics and professors, but thanks to weapons, exploitation, and today teaches everone in universities falsehoods how to make money and become like the West. We do not in India want to become like the West. We do not like your values. We also do not want to be like the Chinese, we do not like China animal treatment, and Japanese whaling. We are Bharat, and we have professors and babas who know a lot. I passed my BSc in economics, but I respect national economics. Modern global economy is not a problem of imbalances, it is a problem of Western control of resources, including technology, internet, and communication. Control over the discourse. BRICS are the future, not the West. You will see with BRICS economies that everythign you teach today, is just propaganda. China is victim of US aggression in which America sells China junk bonds, on which it will eventually take default and transform into junk in some way, like Milken did. Then the Chinese will pay the price, not Americans. This is economics, not trade balances. Mr. Pettis, you know the Chinese economy is American and EU owned. These corporations serve Washington, and you serve Washington too. Stop pretending you speak for China. Stupid comments who say censorship not even having read what being read. This is stupid Western thing. First you teach everyone about freedom of speech, next you tell everyone when and how to shut up. This is your hypocritical Western lies. Now you censor me please.

    • ChandraVJ

      Your nonsense, born of great legacy in previous generations of thinkers, is exactly what will ensure that the inefficient structures that have limited innovation and growth in the Indian model will continue to do so, as India’s population grows by a third, under the conditions of inter-group compeititon, born of not simply religious but class based interests, which inevitably are due to the maligned characters of people, within the confines of the structural forces that obtain to the society, while inhibiting its transformation.

      The mass of reasons you state for the West’s “success”, are well the ideological claptrap of previous generations who have inhibited the transformations required decades ago on the Indian subcontinent, which has still not occurred, mostly for the assumptions that still obtain of these to the present day.

      A shame really, for India had not a moment to waste 60 years ago, and still it seems to waste more, even today. Of course there are great global trends, that would like to see the effectiveness of any grouping, and the success of BRICs, rather than a challenge, might be necessary for the countries and groupings, in the regions themselves, far more than any challenge to the faulty assumptions upon which an others “success” is so easily placed. But such notions are far more pleasing to our psyches than others which have far more relation to ourselves, inevitably. If she hadn’t left, I would have had a much happier life. I am not sure whether or not she has left, but would advise to focus on a happier life, and of course, this is not found in the external other of nefarious intent mantra.

    • Is this what passes for intellectual debate in India?

    • First off, I don’t consider Modi a nationalist or BJP a nationalist party. Secondly, nationalism is the scum of mankind that comes from Western European thought.

      Thirdly, I don’t think it’s fair to compare the US to any country in Europe or to call them under one umbrella as “the West”. I always hear this from people, but it makes no sense. The structure of these regions (politically, economically, and socially) are fundamentally different.

      • Really…..

        From their website

        Hindutva or Cultural Nationalism presents the BJP’s conception of Indian nationhood. It must be noted that Hindutva is a nationalist, and not a religious or theocratic, concept. An article by Shri Arun Shourie, in the wake of what has come to be known as the Hindutva Judgement by the Supreme Court, put the concept in greater detail.”


        When it rains, do you consider uncovered grass wet. Can you, even have an opinion on such a matter. Perhaps, this is a Rothchild, Builderburgher, trilateral commission type conspiracy,thingy where the BJP is the nefarious other, who has set out, stating one thing, to do another thing (secretly). Otherwise also known as by westerners and developing world intelligentsia of the nationally culturally inclined (although, not toungue in cheek, I realize not you) also, known as), the ongoing criticism of the West trying to instill their values in us, or doing this and that for their maniacal benefit, while keeping us poor victims, poor victims.

        They are sly, aren’t they. And of course they are trying to do it to me, but I know what they are up to, and am not fooled.

        Such above is the over-materialized ego-self-related to another thing, objectified, able to be manipulated as an object within the expanses of our psyche, in a process of sense-making, often too the detriment of our souls and spirits.

        Chandra has the great Bharat, no, impeded by the other, humming a tune of humilation and shame, that the great cultural hero is to wise to see, and necessarily against, even at the cost of their grandchildrens ability to flourish. In perpetuity, dis-empowering non-sense, for the actual power of maligning elites.

        • Hindutva isn’t Hindu nationalism or fundamentalism.

          This was the ruling by the Indian Supreme Court in 1995.

          “Ordinarily, Hindutva is understood as a way of life or a state of mind and is not to be equated with or understood as religious Hindu fundamentalism … it is a fallacy and an error of law to proceed on the assumption … that the use of words Hindutva or Hinduism per se depicts an attitude hostile to all persons practising any religion other than the Hindu religion … It may well be that these words are used in a speech to promote secularism or to emphasise the way of life of the Indian people and the Indian culture or ethos, or to criticise the policy of any political party as discriminatory or intolerant.”

  41. lovely debate lads! Michael must have infinite time to read so much junk and comment on it. Not in favor of censorship thought. Comments section of most blogs is useless. Full of weirdos trying to prove they are smart, and everyone pretending to have thick skin, crying when the first verbal punch trolls them.

    Must admit Perplexed does make some amusing points, not sure what the harm is nor where the irritation comes from in response. I mean his whole “transmission mechanism” bit is a good read on history. Just hate the typos. If you dont like what he says, why not ignore him?

    I’m chiming in for different reason. Want to ask the professor if he plans on visiting our neck of the woods, doing some public tours, and also interested in what he thinks of Nouriel Roubini and Kyle Bass. I.e. UK, EU.

  42. NotAPerplexedProfessor

    I will admit there is a rather odd feel of attachment to Michael Pettis from some of those who make personal attacks against other commentators here. I thus second Perplexed’s observation. Granted judging people’s subconscious behavior is part of my behavioral econ. background, of which I am a professor.

    To the above two comments (Juan and Xavier) I’d like a shout out: are you suggesting we all accept censorship on the basis of someone’s subjective notion of propriety? In that case your own comments should immediately be removed since they amount to little more than personal attacks and ignore the economic content of the discussion, some of which are incredibly valid (!). They also offend me as a believer in freedom of speech and my own cultural sensitivities which believe that freedom of speech is sacred. You are grovelling idiots and it reflects on your own IQs if you take that line. The only rule for freedom of speech is that we cannot tolerate the intolerant. You don’t believe in someone’s right to free speech? Then you should be the first to get it yanked away. It’s a two-way street buddy, and you can’t judge others etiquette without subjecting your own etiquette to the same judgment. Its inflammatory to insult others IQs on the basis of personal attacks, while pooh-poohing the relevant arguments they make. In that case why do your comments go up, and others don’t? Short of personal threats, or spam, there is no reason for anyone to impose their standards of politeness on what others have to say. It’s not the call of commentators to say when other’s commentator’s ideas matters or not. Either ignore the comment, speak to the topic, but I frankly can’t think of a bigger waste of time than making any of this personal.

    Let me make a suggestion Michael. Be clear in your own guidelines. Some readers here make very good comments on economics, even if their spelling is atrocious (hire an editor). I don’t see a problem with their tone, and I don’t see why you would either, and I don’t see why you condone those who attack them personally. No personal comments seem to have been made against you, other than calling out some biases which we all have. These seem to have been pointed out with a very sincere intent of engaging you. If you are going to delete something, then it should be irrelevant personal attacks against commentators who challenge your biases. Otherwise you are running the risk of being perceived as encouraging sycophants. Sycophants are always weak, immature, and tend to whine. They tend towards group think, insularity, and self-flattery. This inevitably rubs off on those who keep them company. As academics we should promote a variety of ideas and accept that their expression will not always correspond to our standards, but at no point should we conflate valid criticism of ideas, with personal attacks. This applies to biases as well. I’m personally grateful when my students take me to task on my own biases, but I make no apologies for these biases. I will simply ask the student to reformulate the question in ways I can access or I’ll ignore it. How students reason is itself quite fascinating, but we shouldn’t forget that they also watch us reason, and the smarter ones are quicker to pick up on our insecurities and weak-points.

    An unclear comments policy, too arbitrary or personal, is counter-productive. I don’t know if PerplexedReader’s accusations of censorship are substantial, and not a ruse. I don’t know if it is a male or female, but you gave the floor to those who conflated her or his rather impressive line of questioning, with a claim she did not seem to overplay about a comment a colleague had made that you found unworthy of publishing. This would have gone entirely unnoticed if you hadn’t allowed irrelevant personal attacks on this commentator to paint you into the “censorship” and “irresponsibility” corner. If you’re going to say that some comments are worthless and hence get thrown out, then why leave up comments like the two above, which are personal attacks upon others and by any measure irrelevant? Leaving them up can be interpreted as you very selectively allowing comments which attack your seeming detractors, but since we can’t see what you judge as inappropriate, we can only assume that personal attacks against your critics are, while comments not to your liking, are not. If that’s the case, you are not encouraging discussion, and I dare say either China has gotten to your head, or you’re confirming a lot of common people’s notions of liberal academic bias.

    Michael, I can’t judge why you choose to answer certain comments and why not others, but it seems you are engaging only those whose perspective flatter your own. Others make very valid points and are ignored by you, because they seem to pose questions you are either not willing to consider or that you seem very uncomfortable with. Of course you have no obligations to do otherwise, but for anyone who actually bothers to read the comments here, the impression one gets is that your personal biases have allowed the conversation to degenerate because you felt very uncomfortable as the blog’s owners, with some rather stellar criticism.

    I want to assure some critics, that not all academicians are disinterested in the opinions of non-academics. There is certainly a serious bias both in academia, and amongst students, significantly out of touch with the opinions of regular people, who are in the right to interrogate us about our own beliefs and assumptions about not only the world as we see it, but their own lives which comprise the world upon which we comment. Often we abstract away ordinary people’s concerns as illiterate, stupid, uninteresting, or ill-informed. This comes easiest when ordinary people challenge our notions about race, culture, inheritance, and immigration, not to mention diversity and jobs. It is a disservice to ourselves, when our knee-jerk reaction is to attack their IQs, calling them stupid, ignorant, and denigrating their concerns, or to allow those who attack them to do so without impunity. You clarified above that you will no longer tolerate irrelevant personal comments. If that’s case you have to decide if this applies only to your own self, or that of others. International economics is not my expertise, that is yours, but blogging and communicating with the public inevitably conveys a personal message about ourselves, and in this case, you might want to consider what you’ve just communicated to everyone in this blog.

  43. very very funny. JuanT and XavierT(rend) are very Spanish names, where Pettis-gee comes from. With my BSc in economics, I am not stupid. I see that Juan and Xavier are most likely Pettis himself for some reasons hidding and attacking stupid commentators . I also never comment like Xavier before because I now comment against imperialist, who hide as economists. You tell us to believe in Free Speech and then shut up the BJP and nationalists who love their country. Typical economics of Western colonial origin of their PhD. Sorry Pettis-gee, but a strange coincidence of you have Juan and Xaiver appear out of nowhere and sound like you too. I hope I am really really wrong, but you western pedantic imperialist professors are very very upset when exposed as manipulators, and Washington likes very “brilliant” professors to hide its imperialism. Your name is “Pettis” but you using Juan and Xavier is extremely “petty”. I have BSc in economisc and I am very learned. Do not think that becuase I am Indian and BJP you can think “dirty darky” who vote BJP. We are smarter than fake “Juan and Xavier” who show you exposed by stupid commentators and your lies to manipulate China and India and BRICS into bankrupcy so you can destroy true people’s aspiratiosn and power to take down Western Imperialism. You kill with your balance sheet, those who disagree with your market fundamentalism, and want a natioanlist economy. If your economics makes it impossible for me to have my BJP and country, then your economics attacks me. kashmir is not BJP problem, it is stolen land populated by Jihadi muslims who for centuries raped and pillaged Great Bharat. They have Bangladesh, they have Pakistan, they want Jammu and Kashmir where Vaishnodevi and Amarnath belong to Hindoos. Your Juan and Xavier are fake darkies professor Imperialist. This is not insulting them, when they cannot materilaise and cannot exist when they are invented by you.

    • I have never read anything more retarded in my life ChandraVJ. I can’t beleive the drivel my comments have generated from some. I mean are y ou some kind of fake profile yourself or did you fall out of central casting for “Hindoo” stereotypes. First, your BRICS suck period. Who except clowns take them seriously. Second, what Western Imperialism? If economic literacy is imperialism then you’re in for a tough ride. Maybe instead of blaming the Muslims for everything in your “Bharat” you should take a good look at your Indian customs of giving the right of way to cows, rather than humans who you let die of thirst and hunger on the street for lack of caste credentials. Maybe instead of jamming up the street becaause you’re afraid of running over a cow, you create pens and larger pasture parks where you keep the cows so that traffic can circulate normaly? As much as I respect India, I think your biggest problem is how you blame everything on anyone but yourself. In keeping with my general critique of the professor’s aversion to culture, I would suggset India, like everyone else, is stuck in time warp when it comes to understanding how its atavistic habits prevent it from advancing economically. It’s not the Muslims or the West which prevent you from advancing, its Hindu beaurocrats who worship the rupee tendered by the of Lakshmi of the Congress party, that prevent good public investment, order, and development. Having seen Bangalore, I understood what a rip-off and Joke your BJP party was. Not a paved road in sight, except where the coporations were, paying zero taxes, because Karnataka thinks that avoiding taxes increases the attractiveness to California business. In the end, a nice fat middle class of IT dudes drives in 4×4 while absolutley not a penny is spent on public goods. I mean it was a joke! No muslims or westerners around to rip you off. Just complete lack of an idea of creating public goods. The beaurocrat himself thinks he is a public good in INdia. I am always irritaed by how everyone in the third world unceasingly attacks the West or their neighbours when they want to explain why they are economically retarded. Looking at home, in their own backyard, where they still spend time defecating in public coverd by a rug (this is a fact for 3/4 of Asia!) or slaughtering poultry in their homes on the 40th floor (in HK, in Malaysia) and then being “shocked, shocked” by SARS outbreaks, is a tall order isn’t it?

      Always have to blame the Westerners or some imaginined other. the professor in this case is someone to be respected even if I agree partly with the idea that he promulgates sweeping generalities which do not respect the domainsn of historians, social scientsits, and international relations experts.

  44. Have you ever considered about including a little bit more than just your articles?
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  45. Estimado Michael,

    The minutes of this interview were excellent! As I just finished reading this (as well as at least 45 minutes worth of comments after the post), I was wondering if you could comment on the following statement made by Joseph Stiglitz back in 2002 in an article called “Globalism’s discontent”.

    Stiglitz states that “Capital-Market Liberalization is inevitably accompanied by huge volatility, and this volatility impedes growth and increase poverty. It increases the risks of investing in the country, and thus investors demand a risk premium in the form of higher-than-normal profits.”

    My first concern s that while it is true that liberalization of capital markets can lead to increased volatility (maybe only true under certain conditions), I fail to see how liberalizing capital markets can impede growth. If countries perpetually lack savings to invest in productive investments, liberalizing capital markets can help alleviate this problem, and in fact decrease poverty.

    My second concern (and my main concern) is that the idea that it increases the risk of investing in a country. I don’t see how a country can suddenly become riskier. Maybe what is meant is that if capital markets are liberalized in such a way that foreign investors only put money into a country into the form of debt, then debt will be expensive for developing countries because they have a higher perceived riskiness. On the other hand, if capital markets were liberalized such that foreign investors can own equity, either in the form of stocks or by fully owning a business, then it might be relatively cheap to invest in developing countries. Rather than seeing stocks having to offer a risk premium, we can see them as selling at a discount for each identical level of return.

    Muchisimas gracias

  46. Hello Professor Pettis,

    You often discuss the irrelevance of moral habits on broader economic patterns. But how can this be? How can such significant characteristics on the personal level not be definitive at the national and international level? In addition to economic incentives, aren’t there also other systems of values and value-transmission?

    I would very much like to hear your thoughts on the effects of morality – persistent cultural effects.

    Thank you!

    • Its hard to answer except to specific cases

      • Hello Professor,

        My question was a more general one asking after how you thought about the effects of culture – it seems by your answer that you don’t carry a general theory.

        Narrowing the question to something measurable: I can’t find it at the moment- so please let me know if it’s apocryphal – but I recall studies citing a difference in savings rate along racial and ethnic lines in the United States. Is this not attributable to cultural characteristics? Or is it a function of how policy affects each group within the economy? I suppose to really have an answer one would need to make a very specific study and sift through the factors – but curious if you have any pre-existing thoughts on this subject.

        Thank you!

        • I don’t think you quite understand what savings is. Savings is, by definition, income not consumed. There’s a difference between personal/household savings and corporate savings. The very fact that there’s racial and ethnic lines of household income or wealth should imply that there’s gonna be differences between personal savings rates.

          The idea that this is surprising or tells us something or about how a function of a policy affects each group is just making logical leaps based on implicit assumptions you don’t realize. There’s little that can be deduced from that considering that it’s just the same information we already know demographically. We’ve known for a long time that the wealthy and those of higher incomes have higher savings rates. If the wealthy have different demographic profiles than the mass of population at large (and they always do in basically every society),then you must have differences of personal savings rates built along demographic lines.

          • If it is so obvious, then any published study would discount for disparities in income. Regardless – I am fairly disinterested in your aggressive and unsubtle opinion.

          • Tristan, I thin you mean “uninterested”, not “disinterested”. The former means “not interested” while the latter means “impartial”. Sorry, I don’t mean to be a jerk, its just that this is an increasingly more common mistake and will eventually lose us a very useful word.

          • “If it is so obvious, then any published study would discount for disparities in income.”

            Published studies in economics are often built on BS, especially in the way they use mathematical models and statistical tools.

            More importantly, by claiming my argument is “aggressive and unsubtle”, do you expect me argument to be passive and subtle? If so, what’s the point in my argument? Why would I try to hide my argument? That makes no sense. If we have a clear idea about where our disagreements are, we can work towards finding some kind of agreement or having discourse. Otherwise, we’re basically wasting our time. I’m merely describing how rigorous thinking operates. Being “subtle” means you’re trying to hide your argument. How the hell does that help discourse?

        • I think we’d have to look into the numbers very specifically, Tristan, and disentangle class-based characteristics from cultural or ethnic characteristics, although that can be very hard to do. There are a number of factors which, if they disproportionately affect one ethnic group or another, may seem to be culturally based. For example if saving levels are inversely correlated with income, ethnic groups with lower average income levels are likely to display lower savings, but not because of they are culturally predisposed to profligacy.

          We also have to be careful of confirmation bias — if you believe certain ethnic groups are predisposed to act a certain way, you see proof everywhere. And we have to be careful of misunderstanding what macro-data say and how these determine our cultural prejudices. When Germany ran deficits in the 1990s the newspapers were full of stories of German inefficiency, of lazy young Germans, particularly East Germans, living off the dole, of a barely functional political system, and of shops never opened. Once they began to run surpluses in the 2000s, these same Germans became hard-working, thrifty, etc. I read recently in the Comments section of the FT a passionate debate in which Germans felt they had a right to their huge surpluses because surpluses are the reward for their hard work.

          Of course that’s wrong. The “reward” for a country that works “hard” is high import levels, not high surpluses. There is by the way a very popular cultural prejudice that some countries are “hard-working” and others not, for example Spain, but this is almost wholly nonsense. For example before the crisis lazy Spaniards worked longer hours every year than hard-working Germans, and my Chinese musicians who toured Europe used to ask me often with great frustration why Germans were so lazy that they would close all their shops by 5 pm?

          We should be wary of simply ignorance of context. I cannot tell you how how often certain behavior is described as typically “Chinese”, for example, because both Chinese and foreigners who see it as Chinese have never seen it happen in other countries. Of course the only other countries they know are rich, Western countries, so it never occurs to them that the behavior is not “Chinese” at all but rather is typical of most other poor, developing countries.

          I guess that is part of the reason for my hostility to cultural arguments — it is used so sloppily and so ahistorically and often to serve such vicious or pathetic ends. That’s not to say culture doesn’t matter at all. Of course it does. My parents saved a lot, and even though they both came from wealthy families (more “upper-class” than wealthy, in my French mother’s case, but provincial upper-class, who are not famously big spenders) their careful savings and the hard work with which my mother built her very successful business in Spain came less from their family backgrounds and more, I suspect, from shared experiences of the tremendous uncertainties associated with the Depression and the War.

          We see something similar here in China. Older Chinese who went through the extraordinary circumstances of the Cultural Revolution tend to be far more risk averse than their children, and more risk averse than can normally be explained by age. This is a kind of “cultural” characteristic, but being thrifty, anxious, unimaginative, and willing to put one’s head down and get the job done as ordered, is not Chinese, any more than my parents attitudes towards sacrifice is French or American. It is the culture of a particular generation of Chinese.

          So the too-long point I would make is not that culture is irrelevant, but that it is less important than we think in determining economic behavior, and when it does matter, it can matter in very subtle ways, and we are as likely to misinterpret the impact of culture as we are to get it right. The kind of thinking that looks to culture to explain things is almost always so incredibly sloppy, bereft of historical knowledge, and ignorant of comparables, that it is usually safe just to assume the speaker is hopelessly wrong.

          • This is basically a longer, more detailed, less aggressive, and more subtle version of my comment above that I was attacked for. When you’re more blunt, you get more for less (although I can certainly be quite verbose).

            More importantly, you speak about confirmation bias which is really important. In today’s world with social media, most people only see what they want to see whilst throwing out or refusing to see what they don’t wanna see. In other words, people on both sides end up in a very tribalistic world where they don’t see the other side and there’s massive confirmation bias reinforcing what they “know” to be true. Hence, you’re seeing further polarization along demographic lines–which should be no surprise. It’s just an important point that makes people unable to think with a cool head on their shoulders. Note that many of these descriptions may include me although I generally see both extremes with nothing in the middle.

          • Hi Professor Pettis,

            Thank you for this detailed comment – much appreciated. Doesn’t the low quality of public discourse in this area invite more engagement at the level of morality rather than less? I know we can address certain economic structures by pulling institutional levers, but wouldn’t highlighting certain behaviors, and making them emotionally exciting, better help moderate economic cycles and drive progress? I hope this question isn’t too general. I submit that beliefs have consequences and the more effectively and powerfully the correct ideas are translated into beliefs, the better.

            (Your examples remind me of the historical accounts Professor Ha Joon Chang cites at the end of Bad Samaritans, which I found very funny. The then British viceroy of India: ‘I found the roads so bad in Germany that I directed my course to Italy’.)

            Given the mutability of culture and the impacts of deeper economic processes, do you have any thoughts on the degraded condition of inner cities in Britain and the United States? I am thinking specifically of the kind of economically barren hellscape described by Dr. Theodore Dalrymple in his many recollections of his time spent as a prison doctor in Birmingham. One of the recurring themes in his writing is what he considers to be the poisonous and pervasive effects of libertinism and permissive personal habits. Even with structural unemployment, surely a population fed bracing propaganda on the virtues and natural rewards of probity and diligence would fare better than a population weaned on despair and entitlement?

            I am trying to square these political narratives with your writing, which reveal the limitations imposed by history from moment to moment. I would very much appreciate your help in understanding how to evaluate issues at the moral and political level given your analysis.

            Thank you,

          • Tristan,

            Moderating cycles can actually reduce future development or growth prospects. Prof. Pettis has discussed this before in both his comments and previous works.

            Fixing inner cities is easy. First, give someone like me total control of the American financial system. Then you can hold a gun to the head of all the financial elites by threatening them with the peasants’ pitchforks if they don’t comply. Notice that most of the financial assets are concentrated in a few large firms. So you can force all large financial institutions to have very high capital ratios (20-25%, maybe higher). Then, you set aside a bank with $1 trillion of capital that has a maximum leverage ratio that’s pretty low (I like a maximum leverage of 3-4). In that development bank, you then set up smaller banks within inner cities whose equity is held by the more comprehensive development bank above which just funds businesses in these areas. In periods of liquidity expansion, you’ll see massive real and genuine growth in inner cities. During periods of liquidity contraction, many of those development banks’ll go bust which means you can just order corporate takeovers by larger financial institutions and force them to set aside capital in case the smaller banks go bust. If they don’t comply, threaten the large banks and their executives with the pitchforks. If something goes wrong, just increase capital in the large banks and then use the current financial system to transfer capital across region and scale.

            I can basically guarantee that this’d work. Prof. Pettis likes to have small decentralized banks. I prefer to have a few large financial institutions centralizing most of the assets with someone like me (preferably me) in charge. Prof. Pettis would say that smaller decentralized banks offer more flexibility. I side with Charles Kindleberger when I say that a few large financial institutions who control most of the assets can actually be much more flexible if you’ve got the right guys running the show. I have a gut feeling the great and late Charles Kindleberger would side with my vision. I think Alexander Hamilton would as well.

            BTW, I’d do the same for a federal infrastructure bank as a part of that structure that also does infrastructure networks between city-regions.

        • Robert – You’re right. I take the correction. Thank you.

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