patrick.net

Kevin says

I know it’s fun to pretend that there’s some looming threat where the chinese are going to own america, but that’s about as realistic as Red Dawn.

2010 Trade deficit with China: $275B (est)
2010 Total US agricultural output: $200B (est)

The Chinese could buy all the food we pull out of the ground and still have a $75B/yr surplus, not much smaller than the trade deficit with Canada ($20B) and Japan ($60B) combined.

We are exporting an immense amount of global economic power to China every year.

If we are only getting personal music players and home appliances in return, we will eventually find ourselves utterly screwed -- being outbid for the world's wealth and thus becoming a helpless nation of ex-consumers who can no longer pay their way in the world with domestic productive enterprise (or capitalist ownership of transnational enterprise).

the rates will simply go up, which will make us reprioritize deficit reduction.

Things were a bit different when the national debt was $3T in 2000.

Here's a graph demonstrating the debt inflection point we passed ca. 2001.

Red is debt public debt, green is household debt, and blue is the sum of the two.

Same graph, scaled to GDP

We're on track to having debt hitting twice our GDP, up from 1.3X of 1990-2000 (and ~0.8X of the 1970s).

So we as a nation are much more vulnerable to interest rate shocks now.

Government borrowing rates going to 5% would result in an annual government debt burden of $750B/yr, +$500B/yr more than now.

That's equal to our entire medicare expenditure, about half of our defense expenditure, ALL of welfare, or ALL of everything else (education + transportation + government + misc)

Mortgage rates rising from where they are now would utterly slaughter the housing market, taking down the patched-together banking system as it stands now, along with the GSEs and FHA/VHA with it.

I'm not entirely sure things are fixable now. The inflationistas have a case, but everyone here already knows my general opinion on that.

A decent middle-class salary in Beijing is $800/mo.

By the end of the decade this should rise to $1250/mo via the yuan strengthening from 6 to 4.

The Chinese consumer is building an immense bank of saved wealth, and the future is bright for them being able to buy things with it, things WE used to be buying.

This nation is going to shift from a consumer society to a debtor society very soon now.

Actually, that switch was thrown 15 years ago and we're just beginning to realize it now.

$44,000 is simply not a viable median American household income any more. Fixing government deficit spending is going to take 15-20% of that back. Wage equilibration with our trading partners is going to take another chunk back, how much, dunno.

This is the reality if we don't print our way to prosperity.

If we do continue to print, then I can't see what's going to happen at all, though my guess is inflation will take from the middle class what taxes didn't.

Troy says

The Chinese could buy all the food we pull out of the ground and still have a $75B/yr surplus, not much smaller than the trade deficit with Canada ($20B) and Japan ($60B) combined.

It's awesome that you think that "The Chinese" are some single entity that can act in a unilateral fashion, and the trade deficit isn't actually spread out amongst thousands of different companies (and most of that deficit comes from products being manufactured for american corporations that have outsourced it anyway)

Troy says

The Chinese consumer is building an immense bank of saved wealth, and the future is bright for them being able to buy things with it, things WE used to be buying.

Not really. The cost of steel, coal, lumber, oil, copper, etc. are exactly the same for a chinese consumer as they are for an american consumer.

Materials account for an average of about 70% of the final price of many goods. That means that the bare minimum that these products will ever sell for is about that.

If you think someone making $1250 a month is going to spend most of their salary to buy a flat screen, I don't know what to tell you.

The Chinese economy can not survive unless it continues exporting cheap goods to other countries. That is why they will continue to buy up our debt, regardless of how much we devalue it.

By the time the average chinese consumer can actually afford to buy these products (due to a combination of machines doing even more of the labor and increased salaries), the chinese export market will no longer be competitive.

The idea that wage equilibrium will ever occur is pure fantasy. If building things in China becomes too expensive, american companies will move their factories to India. If building things in India becomes to expensive, they will move their factories to Africa. If building things in Africa becomes too expensive, they will move their factories back to their home country.

Really, these kinds of exploitative labor systems have always existed and always will. The benefit is entirely of the exploiters (that includes you and me, people who buy the cheap chinese made stuff) and not to the exploited. This was true when the British were forcing spice, tea, and silk makers in India to sell their products for a fraction of their actual worth, it was true when plantation owners enslaved people to till their lands, and it's true now.

As soon as cost of shipping + cost of import duties > difference in labor costs (and probably sooner, given other barriers to doing business in china), that export machine dries up.

50 years from now, the standard of living and median household income (in PPP) in the united states will be much higher than the standard of living and median household income in China.

Yes, there probably will be more chinese households than american households making a good living (it's inevitable with so many people). That will not make American households poor as a result.

It is quite likely that the world of the future will see the complete elimination of most unskilled manufacturing jobs. Low wage jobs will continue to exist, in the form of household laborers and the like (as they always have and always will).

There's actually very little reason that China won't simply become a larger version of Japan. The rise of Japan didn't harm american standards of living, just like the rise of America didn't harm European standards of living. Zero summers constantly misjudge these changes.

Kevin says

If you think someone making $1250 a month is going to spend most of their salary to buy a flat screen

my point is that 1.2 billion people are going to be getting 33% raises this decade as the yuan moves from 6 to 4.

They will be getting 33% more stuff for their money. The TV they do buy will be 33% bigger. They'll be burning 33% more gas than they do now. They'll be going to KFC 33% more often.

Zero summers constantly misjudge these changes.

Get back to me when oil is $500/bbl.

Troy says

They will be getting 33% more stuff for their money. The TV they do buy will be 33% bigger. They’ll be burning 33% more gas than they do now. They’ll be going to KFC 33% more often

Yes, and they still won't be able to afford to buy the things that they are exporting.

Troy says

Get back to me when oil is $500/bbl.

There's a pretty good chance that it'll never happen in inflation-adjusted terms, so sure. Demand for oil in the US has peaked, and it's pretty close to peaking in China. Current trends in technology just about guarantee that demand for oil in 50 years will be less than they are today.