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Isn't everyone and their dog trying to devalue their currency these days to boost exports? What's the problem with weak yuan? Sure, iPhones will get even more e

Isn't everyone and their dog trying to devalue their currency these days to boost exports? What's the problem with weak yuan? Sure, iPhones will get even more expensive to buy in China (rather funny since they are made there) but other than that it should be a boon to exports, no?

ryandamm 11y ago
The main problem is a devalued currency stokes inflation, so consumer costs go up (so do producer costs, but that's offset by better export earnings). China is in the middle of a shift from an export-driven economy to a consumption-driven economy, part of the normal development arc of major economies. But increasing export profits at the expense of households pushes that balance in the wrong direction. For more (much more!) detail on this, I highly suggest the blog 'China Financial Times' by Peking University professor Michael Pettis: mpettis.com. But generally, yes: the world has a savings glut, and devaluing your currency helps export your domestic weakness (some economists call devaluation 'exporting your unemployment'). China is in a rather unique situation though.
- tosseraccount 11y ago
  Devaluation causes inflation? Not necessarily: http://www.economicshelp.org/macroeconomics/macroessays/does-devaluation-cause-inflation/ http://www.economicshelp.org/macroeconomics/macroessays/does...
  - rdlecler1 11y ago
    If China starts to devalue their currency, so will their Asian neighbors. They know that a race to the bottom isn't going to be the answer.
- bcg1 11y ago
  $57 trillion in world debt is something quite unlike a savings glut. And that is just public debt, and it is growing quickly. http://www.economist.com/content/global_debt_clock http://www.economist.com/content/global_debt_clock But in general I agree with your overall statement... everyone talks about China's "ghost cities" as if they are some sort of quixotic or keynesian tomfoolery... but a simpler explanation is simply that China wants to urbanize and grow a middle class as part of the development cycle you mentioned. They probably need a "hard landing" in order to cool off their real estate market and clear out the dead wood of their malinvestment in order to realize that goal.
  - Eliezer 11y ago
    If you save another dollar in the bank, that's another dollar of global debt that the bank owes you - it's how the accounting works.
    - bcg1 11y ago
      Right, of course. But ultimately debts are paid back through energy creation, natural resource extraction, tangible assets, and human labor. The accounting details of fractional reserve banking in a debt based monetary system aside, that is a huge sum of human labor that governments have promised... and if that money ever gets paid off it will require the global workforce to work for decades to do it... I would hardly call that a "savings glut".
      - selectodude 11y ago
        World GDP is $75 trillion. So governments worldwide have promised less than one year of labor.
      - pjc50 11y ago
        if that money ever gets paid off it will require the global workforce to work for decades to do it How much of that is pensions? People work for decades, in the expectation of a pension, creating the pension liability; and are then going to require possibly decades of other people's work while they themselves are too old to work. Discussion of "paying it off" is meaningless when it can only be sensibly rolled over forever.
        bcg1 11y ago
        Look that's why I said "if that money ever get paid off" not "when it gets paid off". And of course the only "not extremely bad" alternative is to continually roll over public debts forever. Financing tricks though don't change the value of the underlying assets, which is really the point that I'm making. I don't disagree at all with what you're saying. The problem is that eventually the debts can grow so large that the people who are expected to service the ever increasing principal and interest payments view the debts and overwhelming and/or odious, and choose to default. Then you get a deflationary spiral (i.e., Greece, Cyprus, etc), or alternatively currencies can hyperinflate to service the debt, which is essentially another form of default (i.e., Japan). We haven't really seen the current situation before, so don't know how this plays out... but we'll find out soon enough I think.
coliveira 11y ago
Devaluing the currency is great for exporting countries, but remember that China's official plan is to develop a consumer based economy. People who use a devalued currency have no purchasing power and inflation can become a huge problem for growth.
- AznHisoka 11y ago
  Why does the economy need to grow? No growth = no bubbles = no busts. Don't see everyone's obsession with growth, growth, growth.
  - khuey 11y ago
    Ever if you adjust for purchasing power parity GDP per capita in China is a fourth of that of the US. It doesn't seem unreasonable to assume that they would like a higher standard of living.
  - yxhuvud 11y ago
    Growth leads to better quality of life over the long term. Yes, really.
  - aminorex 11y ago
    Exploding Gini infers a trilemma: Revolution, redistribution, or growth.
- crdoconnor 11y ago
  If that were actually their plan they would be strengthening their safety net. The Chinese savings glut (and lack of consumer based spending) is driven in no small part about fear of getting ill, growing old poor, etc.
ctrl_freak 11y ago
All other things being equal, a weak currency is a good thing for a country. Unfortunately for China, a weak currency comes with a host of other problems, one of the most significant is capital outflow: http://www.bloomberg.com/news/articles/2015-09-25/china-capital-outflows-hit-record-in-august-on-yuan-weakness http://www.bloomberg.com/news/articles/2015-09-25/china-capi...
- EGreg 11y ago
  Good thing according to what goal? I think countries have various trade imbalances and rectifying them is good for the country. At the end if the day, though, robots will do most of the work.
  - eru 11y ago
    Funny enough, post-war Germany traditionally ran a trade surplus and a very strong currency.
- adventured 11y ago
  Don't tell the wealthiest country per capita in world history that - Switzerland. One of the few European nations that skated through the last decade almost entirely unscathed. They made a mistake in their attempt at currency debasement a while back, however they've almost always gone with a strong currency, and it has done wonders for their well-being. The median Swiss now earns twice what the median German does. Also don't tell the US from 1820-1970 that. The strong dollar, backed by a gold standard, enabled the US to become the largest economy at warp speed. A balanced to strong currency is ideal for a country. It provides increased purchasing power for consumers; it lures foreign capital; it keeps import costs low, including for commodities + producers; it keeps inflation from eroding the standard of living of the bottom 3/4 of citizens that can't hedge inflation; and it generates confidence for consumers, foreign investors, domestic investors, and businesses.
memracom 11y ago
Seems to me that the real driver of currency devaluation is the price of oil. By devaluing you protect your economy from big shocks because the price of oil stays unchanged, in the local currency. Russia did the same and has managed to maintain an economic boom in manufacturing, new industry, and hight tech military hardware. You can't pay attention only to numbers. You have to factor in culture, and a culture of hard work and innovation will beat the numbers every time. Not saying that they might not suffer a bit, but lets not forget that economy is a cyclic thing. What goes down will come up before too long because very smart people are hedging against all possibilities.
- nl 11y ago
  By devaluing you protect your economy from big shocks because the price of oil stays unchanged, in the local currency. Russia did the same and has managed to maintain an economic boom in manufacturing, new industry, and hight tech military hardware. That doesn't make sense. The oil price is denominated in US dollars, so by devaluing you push it up. It's true that the price of oil is dropping too, but in the case of China they don't have domestic reserves so that doesn't matter. IN the case of Russia they are in a pretty severe recession: http://www.reuters.com/article/us-russia-economy-idUSKBN0U70ZO20151224 http://www.reuters.com/article/us-russia-economy-idUSKBN0U70...

ryandamm 11y ago

The main problem is a devalued currency stokes inflation, so consumer costs go up (so do producer costs, but that's offset by better export earnings). China is in the middle of a shift from an export-driven economy to a consumption-driven economy, part of the normal development arc of major economies. But increasing export profits at the expense of households pushes that balance in the wrong direction. For more (much more!) detail on this, I highly suggest the blog 'China Financial Times' by Peking University professor Michael Pettis: mpettis.com. But generally, yes: the world has a savings glut, and devaluing your currency helps export your domestic weakness (some economists call devaluation 'exporting your unemployment'). China is in a rather unique situation though.

tosseraccount 11y ago
Devaluation causes inflation? Not necessarily: http://www.economicshelp.org/macroeconomics/macroessays/does-devaluation-cause-inflation/ http://www.economicshelp.org/macroeconomics/macroessays/does...
- rdlecler1 11y ago
  If China starts to devalue their currency, so will their Asian neighbors. They know that a race to the bottom isn't going to be the answer.
bcg1 11y ago
$57 trillion in world debt is something quite unlike a savings glut. And that is just public debt, and it is growing quickly. http://www.economist.com/content/global_debt_clock http://www.economist.com/content/global_debt_clock But in general I agree with your overall statement... everyone talks about China's "ghost cities" as if they are some sort of quixotic or keynesian tomfoolery... but a simpler explanation is simply that China wants to urbanize and grow a middle class as part of the development cycle you mentioned. They probably need a "hard landing" in order to cool off their real estate market and clear out the dead wood of their malinvestment in order to realize that goal.
- Eliezer 11y ago
  If you save another dollar in the bank, that's another dollar of global debt that the bank owes you - it's how the accounting works.
  - bcg1 11y ago
    Right, of course. But ultimately debts are paid back through energy creation, natural resource extraction, tangible assets, and human labor. The accounting details of fractional reserve banking in a debt based monetary system aside, that is a huge sum of human labor that governments have promised... and if that money ever gets paid off it will require the global workforce to work for decades to do it... I would hardly call that a "savings glut".
    - selectodude 11y ago
      World GDP is $75 trillion. So governments worldwide have promised less than one year of labor.
    - pjc50 11y ago
      if that money ever gets paid off it will require the global workforce to work for decades to do it How much of that is pensions? People work for decades, in the expectation of a pension, creating the pension liability; and are then going to require possibly decades of other people's work while they themselves are too old to work. Discussion of "paying it off" is meaningless when it can only be sensibly rolled over forever.
      - bcg1 11y ago
        Look that's why I said "if that money ever get paid off" not "when it gets paid off". And of course the only "not extremely bad" alternative is to continually roll over public debts forever. Financing tricks though don't change the value of the underlying assets, which is really the point that I'm making. I don't disagree at all with what you're saying. The problem is that eventually the debts can grow so large that the people who are expected to service the ever increasing principal and interest payments view the debts and overwhelming and/or odious, and choose to default. Then you get a deflationary spiral (i.e., Greece, Cyprus, etc), or alternatively currencies can hyperinflate to service the debt, which is essentially another form of default (i.e., Japan). We haven't really seen the current situation before, so don't know how this plays out... but we'll find out soon enough I think.

coliveira 11y ago

Devaluing the currency is great for exporting countries, but remember that China's official plan is to develop a consumer based economy. People who use a devalued currency have no purchasing power and inflation can become a huge problem for growth.

AznHisoka 11y ago
Why does the economy need to grow? No growth = no bubbles = no busts. Don't see everyone's obsession with growth, growth, growth.
- khuey 11y ago
  Ever if you adjust for purchasing power parity GDP per capita in China is a fourth of that of the US. It doesn't seem unreasonable to assume that they would like a higher standard of living.
- yxhuvud 11y ago
  Growth leads to better quality of life over the long term. Yes, really.
- aminorex 11y ago
  Exploding Gini infers a trilemma: Revolution, redistribution, or growth.
crdoconnor 11y ago
If that were actually their plan they would be strengthening their safety net. The Chinese savings glut (and lack of consumer based spending) is driven in no small part about fear of getting ill, growing old poor, etc.

ctrl_freak 11y ago

All other things being equal, a weak currency is a good thing for a country. Unfortunately for China, a weak currency comes with a host of other problems, one of the most significant is capital outflow: http://www.bloomberg.com/news/articles/2015-09-25/china-capital-outflows-hit-record-in-august-on-yuan-weakness http://www.bloomberg.com/news/articles/2015-09-25/china-capi...

EGreg 11y ago
Good thing according to what goal? I think countries have various trade imbalances and rectifying them is good for the country. At the end if the day, though, robots will do most of the work.
- eru 11y ago
  Funny enough, post-war Germany traditionally ran a trade surplus and a very strong currency.
adventured 11y ago
Don't tell the wealthiest country per capita in world history that - Switzerland. One of the few European nations that skated through the last decade almost entirely unscathed. They made a mistake in their attempt at currency debasement a while back, however they've almost always gone with a strong currency, and it has done wonders for their well-being. The median Swiss now earns twice what the median German does. Also don't tell the US from 1820-1970 that. The strong dollar, backed by a gold standard, enabled the US to become the largest economy at warp speed. A balanced to strong currency is ideal for a country. It provides increased purchasing power for consumers; it lures foreign capital; it keeps import costs low, including for commodities + producers; it keeps inflation from eroding the standard of living of the bottom 3/4 of citizens that can't hedge inflation; and it generates confidence for consumers, foreign investors, domestic investors, and businesses.

memracom 11y ago

Seems to me that the real driver of currency devaluation is the price of oil. By devaluing you protect your economy from big shocks because the price of oil stays unchanged, in the local currency. Russia did the same and has managed to maintain an economic boom in manufacturing, new industry, and hight tech military hardware. You can't pay attention only to numbers. You have to factor in culture, and a culture of hard work and innovation will beat the numbers every time. Not saying that they might not suffer a bit, but lets not forget that economy is a cyclic thing. What goes down will come up before too long because very smart people are hedging against all possibilities.

nl 11y ago
By devaluing you protect your economy from big shocks because the price of oil stays unchanged, in the local currency. Russia did the same and has managed to maintain an economic boom in manufacturing, new industry, and hight tech military hardware. That doesn't make sense. The oil price is denominated in US dollars, so by devaluing you push it up. It's true that the price of oil is dropping too, but in the case of China they don't have domestic reserves so that doesn't matter. IN the case of Russia they are in a pretty severe recession: http://www.reuters.com/article/us-russia-economy-idUSKBN0U70ZO20151224 http://www.reuters.com/article/us-russia-economy-idUSKBN0U70...