World Economy Finding a Bottom Because the Keynesians are in China
Starting last June, the global economy began to fall apart; and in September it rolled off the table and entered what can only be called "freefall." That is, usually in economics, one person’s misfortune is another person’s gain. If prices drop, at least someone is convinced to spend. Instead, job losses begat job losses, and bank failures begat bank failures. Comparisons to the Great Depression abounded. It had been a long time in coming, and while slightly earlier than it might have happened, the crash of markets, finances, and real economic activity had been writ large. Some had hoped for "decoupling;" that it would be a US crisis only, and the rest of the world would chug on. These happy people pointed to how many European nations had not entered recession in 2001 when the US did. But that was a narrow and shallow contraction driven by a short term pull back in capital spending; and which was punctuated with 9/11, which for whatever the evil of it, gave governments a large blank check. The American consumer, the source of world demand, kept spending.
In this recession the effects ripped across the globe, causing massive falls in GDP for the last quarter of 2008 and the first quarter of 2009. Some countries on the edges, like Iceland and Ireland, were "super coupled;" that is, they took falls far worse than the rest of the world because they had gone all Chicago School and begged, borrowed, and stolen to get off-shored work from other nations. That work evaporated because, as servants to the moneyed class, they rose and fell further in each direction.
So what do they call "green shoots?" Why did Geithner go to China and promise US deficit reduction? Why is deficit reduction in the face of a weak US economy Obama’s new mantra? Because the world is finding a new source of demand. You can see it in the way resource prices have bounced back, such as oil. That’s why the gas pump is telling you there is a recovery even though the help wanted pages are telling you there is a recession. The Chinese aren’t just buying oil, they are trying to buy oil companies as well. And the Chinese do not want the United States bidding up resource prices that they want for their development. There has been a real shift in global power and it is not towards the United States, nor the United States government.
China’s state economy has done what the US has not done in raw economic terms. Its banks were always basically insolvent and nationalized, so the crisis merely meant they had to continue a policy of injecting capital as needed into banks to insure liquidity. They embarked on a massive fiscal spending program knowing that the time to buy copper, oil, steel, and other "stuff," as finance people call it, is now. Money would never be cheaper, labor never more available, and the power to leverage this into economies that the developed world was cutting off could not come at a more useful moment. It conjured John Maynard Keynes and put him to work.
It is working. China’s economy returned to rapid growth, even though faced with worse macro-deflationary pressures, and worse meso-inflationary rips between inflating cities and a deflating countryside:
A central bank survey showed household inflation expectations had risen to a record high even though the economy remained at risk of a sustained bout of deflation.
Industrial production rose 8.9 per cent in May from a year earlier, higher than April’s 7.3 per cent year-on-year growth. Retail sales increased 15.2 per cent in May from a year earlier after a 14.8 per cent rise the previous month.
The Chinese want Milton Friedman for Detroit so that Shanghai’s car city can hum. They want hard money for the United States so that they can use soft money. They are leaving neo-liberal monetary policy to others; and instead, are placing their faith in what amounts to command Keynesianism.
It also means something else that people are missing. In this crisis, the United States is not the United States of the Great Depression. We are the hegemonic power: Great Britain. Great Britain’s decisions in 1925 made possible the great collapse a few years later because they placed the world on an unsustainable spiral. The Chinese are half of what the US was in that era: the great outpost of growth and the future. Now the world is moving to a circumstance where more and more of the future relies on a country that is still isolated from the rest of the world politically, while integrated economically.
It is this demand that is helping the global economy find a bottom, but not the one that the "surplus" theory advocates want. China is not buying consumer goods made by other nations, nor even capital goods; but buying raw materials at the bottom and whole companies at the top.