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Yes. Pettis. Anyone on HN commenting on economics must read Pettis. In very brief his simplified thesis: One country's public policy decision to subsidize expor

by rrggrr 9y ago

Yes. Pettis. Anyone on HN commenting on economics must read Pettis. In very brief his simplified thesis: One country's public policy decision to subsidize export-led growth requires another country's public policy decision to also subsidize that growth through import consumption and debt. The accounts must balance.

ryandamm 9y ago
I agree! His simple-but-not-too-simple model to explain international macro economics is really great, and happens to explain a lot of the dynamics of what we see these days. It's appealing intellectually; I like small and simple models. I suppose if we see a major dislocation in the Chinese economy in the next 2-3 years, his model will be extra-confirmed. (That's a major point he makes on his blog.)
- int_19h 9y ago
  Can you recommend a good starting point to read up on this?
  - ryandamm 9y ago
    Well, I was introduced to Pettis via Paul Krugman's blog at the NYTimes... but in practice, you just gotta wade in. Be comfortable with being lost the first few tens of thousands of words on his blog, and it will add up. Pettis doesn't really give a primer; he discusses lots of different issues through the same lens, and his target audience appears to be readers with at least an undergraduate understanding of economics and a passing familiarity with balance sheets (I had neither). Frankly, I picked it up via muscle memory (and lots of context-Googling; Wikipedia helps, and StackOverflow has a surprising amount of basic economics info). I think the bottom line is this: if you're willing to devote a few hours (maybe low tens of hours) to slogging through his posts, occasionally re-reading them a few times and searching elsewhere for explanation of terms, you'll start to understand his balance-sheet theory of macro. And it doesn't require much context, to be honest: one of the beauties of his framework is it glosses over so much of the complexity of an economy by dealing with clear and clean abstractions at the national level. (It's only an okay source for understanding the internal dynamics of an economy; the blog really mostly focuses on international macro.) I hope that helps... though acknowledge it might not! (My interest was driven by a burning desire to understand WTF just happened!?! circa 2008; that motivation is probably hard to conjure without context, to be honest.)
  - ryandamm 9y ago
    A little late, but Pettis obliged with his latest post. It's more directly answering your question, I think: https://news.ycombinator.com/item?id=14408165 https://news.ycombinator.com/item?id=14408165
rsync 9y ago
"In very brief his simplified thesis: One country's public policy decision to subsidize export-led growth requires another country's public policy decision to also subsidize that growth through import consumption and debt. The accounts must balance." Isn't that only necessary in nominal currency ? That is, theoretically a country could introduce some factor that caused their currency, held by their trading partner, to increase in value to match their new export output ? The balance sheet would pencil out nominally, but there could still be an imbalance relative to some other value ... Isn't this difference between nominal and real values on the balance sheet what causes the tension between what dollar assets the Chinese hold vs. what they set their currency to vs. what our trade balance is ?
- SilasX 9y ago
  The claim was that debt must go up 1-to-1 with capital inflows and that you can't regard the inflows as good without also praising the necessarily-corresponding debt. It seems all these excellent answers actually agree that it's not true unless the money is deposited and re-lent. That's certainly likely in practice, but far from the implied "Oh silly layman, foreigners can't invest in your business without your country's debt going up, it's physically impossible."
  - ryandamm 9y ago
    It's true in practice, because of the practical ways in which large-scale capital flows are manifested. The stronger point, that it's true in all cases, is made by Pettis somewhere deep in his blog... and it boils down to the idea that other edge cases diffuse the allocation of debt, investment, capital -- but the identity must still hold true at the level of abstraction of the nation / currency area. Those edge cases tend to look starker (and harder to explain) in toy models, though. I can't really do his argument justice, though. Sorry! I'm simply nowhere near sophisticated enough. But... the case where it's not re-lent, there is still exchange-rate pressure, but the 'missing' capital (say it's not stuck under a mattress, but is instead burned in a furnace) effectively deflates the remaining capital in the economy. The identities still balance. Again, the exact allocation of debt etc doesn't matter to the identity, and it's easy to construct a situation where the capital somehow disappears, or the underlying mechanism (or lack of mechanism) obscures the overall identity. This all works because currency is effectively meaningless, it's a derivative of actual 'value' in an economy, as measured by the total output of goods and services. I'm going to stop here before I butcher it any worse; but if you find this at all interesting, Pettis is a much better source than I.

by rrggrr 9y ago

ryandamm 9y ago

I agree! His simple-but-not-too-simple model to explain international macro economics is really great, and happens to explain a lot of the dynamics of what we see these days. It's appealing intellectually; I like small and simple models. I suppose if we see a major dislocation in the Chinese economy in the next 2-3 years, his model will be extra-confirmed. (That's a major point he makes on his blog.)

int_19h 9y ago
Can you recommend a good starting point to read up on this?
- ryandamm 9y ago
  Well, I was introduced to Pettis via Paul Krugman's blog at the NYTimes... but in practice, you just gotta wade in. Be comfortable with being lost the first few tens of thousands of words on his blog, and it will add up. Pettis doesn't really give a primer; he discusses lots of different issues through the same lens, and his target audience appears to be readers with at least an undergraduate understanding of economics and a passing familiarity with balance sheets (I had neither). Frankly, I picked it up via muscle memory (and lots of context-Googling; Wikipedia helps, and StackOverflow has a surprising amount of basic economics info). I think the bottom line is this: if you're willing to devote a few hours (maybe low tens of hours) to slogging through his posts, occasionally re-reading them a few times and searching elsewhere for explanation of terms, you'll start to understand his balance-sheet theory of macro. And it doesn't require much context, to be honest: one of the beauties of his framework is it glosses over so much of the complexity of an economy by dealing with clear and clean abstractions at the national level. (It's only an okay source for understanding the internal dynamics of an economy; the blog really mostly focuses on international macro.) I hope that helps... though acknowledge it might not! (My interest was driven by a burning desire to understand WTF just happened!?! circa 2008; that motivation is probably hard to conjure without context, to be honest.)
- ryandamm 9y ago
  A little late, but Pettis obliged with his latest post. It's more directly answering your question, I think: https://news.ycombinator.com/item?id=14408165 https://news.ycombinator.com/item?id=14408165

rsync 9y ago

"In very brief his simplified thesis: One country's public policy decision to subsidize export-led growth requires another country's public policy decision to also subsidize that growth through import consumption and debt. The accounts must balance." Isn't that only necessary in nominal currency ? That is, theoretically a country could introduce some factor that caused their currency, held by their trading partner, to increase in value to match their new export output ? The balance sheet would pencil out nominally, but there could still be an imbalance relative to some other value ... Isn't this difference between nominal and real values on the balance sheet what causes the tension between what dollar assets the Chinese hold vs. what they set their currency to vs. what our trade balance is ?

SilasX 9y ago
The claim was that debt must go up 1-to-1 with capital inflows and that you can't regard the inflows as good without also praising the necessarily-corresponding debt. It seems all these excellent answers actually agree that it's not true unless the money is deposited and re-lent. That's certainly likely in practice, but far from the implied "Oh silly layman, foreigners can't invest in your business without your country's debt going up, it's physically impossible."
- ryandamm 9y ago
  It's true in practice, because of the practical ways in which large-scale capital flows are manifested. The stronger point, that it's true in all cases, is made by Pettis somewhere deep in his blog... and it boils down to the idea that other edge cases diffuse the allocation of debt, investment, capital -- but the identity must still hold true at the level of abstraction of the nation / currency area. Those edge cases tend to look starker (and harder to explain) in toy models, though. I can't really do his argument justice, though. Sorry! I'm simply nowhere near sophisticated enough. But... the case where it's not re-lent, there is still exchange-rate pressure, but the 'missing' capital (say it's not stuck under a mattress, but is instead burned in a furnace) effectively deflates the remaining capital in the economy. The identities still balance. Again, the exact allocation of debt etc doesn't matter to the identity, and it's easy to construct a situation where the capital somehow disappears, or the underlying mechanism (or lack of mechanism) obscures the overall identity. This all works because currency is effectively meaningless, it's a derivative of actual 'value' in an economy, as measured by the total output of goods and services. I'm going to stop here before I butcher it any worse; but if you find this at all interesting, Pettis is a much better source than I.