Posted on 01/12/2009 9:23:38 PM PST by TigerLikesRooster
How will China deal with the US adjustment?
January 9, 2009 by FT
By Michael Pettis
The post-1997 global balance is breaking down, and the world is lurching drunkenly to find a stable new balance. Until now, Chinese overproduction has balanced US overconsumption, leading to China’s massive trade surplus and capital account deficit. Inevitably, however, a reduction in US overconsumption, a necessary consequence of the financial crisis, must force a corresponding reduction in overproduction elsewhere, and China, like it or not, will have to bear the brunt of the adjustment. The US and Europe must design their fiscal and monetary policies in part to ease China’s adjustment, which will otherwise be extremely difficult.
For most of the past 60 years US household savings rates have varied between 6 per cent and 10 per cent of gross domestic product. In the early 1990s the savings rate began declining, virtually collapsing after 1997 to well under 2 per cent of GDP. If American households rebuild balance sheets by raising household savings rates only to the historical mid-point, their savings must rise by roughly 6 per cent of US GDP.
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Ping!
China is the world’s factory. What happens when orders at the factory fall off?
Layoffs and recession. America is over extended and needs time to catch up, although the government seems poised to spend us into permanent oblivion.
>>China is the world’s factory. What happens when orders at the factory fall off?<<
They will harvest a lot of rice for internal consumption.
Stuff will be manufactured in the US and sold at "exorbitant prices"?
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