Another Giant with Feet of Clay

I remember how in the 1980s Americans were running around terrified because a growing Japan would soon overtake them. The Japanese were buying assets in America and it looked like the new overlords would all be Japanese. Then Japan hit a wall with its property speculation meltdown and its stock market meltdown.

For the last few years Americans have been running around terrified because a growing China will soon overtake them. The Chinese are buying assets in America and it looks like the new overlords will all be Chinese. But...

Paul Krugman sees an economic crisis looming in China. From his NY Times op-ed:

China has stumbled into a monetary muddle that’s getting worse with each passing month. Furthermore, the Chinese government’s response to the problem — with policy seemingly paralyzed by deference to special interests, lack of intellectual clarity and a resort to blame games — belies any notion that China’s leaders can be counted on to act decisively and effectively. In fact, the Chinese come off looking like, well, us.

How bad will it get? Warnings from some analysts that China could trigger a global crisis seem overblown. But the fact that people are saying such things is an indication of how out of control the situation looks right now.

The root cause of China’s muddle is its weak-currency policy, which is feeding an artificially large trade surplus. As I’ve emphasized in the past, this policy hurts the rest of the world, increasing unemployment in many other countries, America included.

But a policy can be bad for us without being good for China. In fact, Chinese currency policy is a lose-lose proposition, simultaneously depressing employment here and producing an overheated, inflation-prone economy in China itself.

...

Could all of this really turn into a full-fledged crisis? If I didn’t know my economic history, I’d find the idea implausible. After all, the solution to China’s monetary muddle is both simple and obvious: just let the currency rise, already.

But I do know my economic history, which means that I know how often governments refuse, sometimes for many years, to do the obviously right thing — and especially when currency values are concerned. Usually they try to keep their currencies artificially strong rather than artificially weak; but it can be a big mess either way.

So our newest economic superpower may indeed be on its way to some kind of economic crisis, with collateral damage to the world as a whole. Did we need this?

There's more. Go read the whole article.

I think it is funny how people linearly extrapolate into the future. If you extrapolated Japan's growth from the 1960s into the early 1980s, it was obvious that they would soon rule the world. It didn't happen. Now people are doing the same thing with China. But the world isn't linear. It is highly dynamic and non-linear. Growth in virgin territory (or after a new invention) typically sigmoid, and is called the logistic curve. Slow growth until the new land (or new invention) is found. Then rapid growth until local resources are exhausted. Then slow growth. But economic observers seem unaware of this pretty obvious fact of life. The economic observers insist on doing linear extrapolations. Silly.