Negative net demand - say what?
Corbett | February 21, 2009 8:50 AM
Last time I had a discussion with Michael Pettis, it was about excess inventories in China (a favorite topic of his), with some BusinessWeek buddies, involving shots at the bar while yelling at each other to be heard over the thrashing punk band on stage 20 feet away. He has an amazing ability to cut out distractions and zero in on a topic and keep zeroing in and in, sort of like functions in calculus where you get infinitely closer to zero, until you don't know what he's talking about anymore.
Today in the quiet of my living room, with only the occasional car horn as a distraction, I'm reading his latest blog, and re-read the below paragraph a few times to understand what he means about why it's not a good idea to devalue the yuan. There's been a lot of talk about this recently, and personally I wouldn't mind if Shanghai got a little cheaper. But will that solve any problems for the world? Pettis doesn't think so, and if you can get your head around "negative net demand" then maybe you won't either.
"Domestically, any increase in total demand will have positive implications for employment, but globally the world needs increases in net demand - that is, consumption minus production. Since China provides negative net demand to the world (it runs a trade surplus), what the world needs from China as global demand contracts is a reduction in the amount of negative net demand China provides."
Link to the article is here.
Category: Mr. Asia
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Paul Denlinger
February 22, 2009 5:21 PM
Yes, but the key lies in whether the Chinese government sees things the same way as Pettis does. If the CN govt panics at some of the unemployment numbers it sees and inventory buildups, it will most likely make moves to push the yuan down. Right now, it is the loudest spokesman against protectionism, which probably means that it will not do anything about the yuan rate to the US dollar just yet.
We have not yet reached the point where the passengers are throwing each other off the sinking ship into the icy waters. Only time will tell whether we reach that point.