Tag Archives: michael pettis

Spain’s’ only three options for recovery

Summary:  The Euro-crisis began in March 2010, and yet its causes and basic elements remain widely misunderstood — including, based on their public statements, by many of Europe’s leaders.  Here Prof Pettis gives a clear explanation of what’s happening, and of Spain’s only three ways out of this crisis.

Excerpt from “Three cheers for the new data?”

By Michael Pettis (Prof of Finance, Peking University)
November 12, 2012
Republished with his general permission.

Spain’s three options

Finally, and to turn away from China, we seem to be experiencing a renewed period of increased optimism over European prospects, but we should refrain from joining in. The optimism will soon fade. In the great debate over the economies of countries like Spain, we sometimes forget the simple arithmetic of economic rebalancing. This arithmetic, like it or not, severely limits the options open to these countries.

For many years, thanks partly to bad policies in Spain but mainly to aggressive attempts by Germany to achieve growth by forcing a trade surplus onto its European neighbors, Spain, and many other countries in Europe, ran enormous trade deficits. It is easy and popular to blame the greed of the Spanish and the stupidity of the government for the mess in which Spain has found itself, but the policies Germany put into place in the late 1990s guaranteed that Germany, a country that had run massive trade deficits in the 1990s, would run equally massive trade surpluses in the subsequent decade.

Because once they joined the euro the rest of Europe had no control over the value of their currencies and the level of their interest rates, it was inevitable that European countries that had joined the euro with higher-than-average levels of inflation would be forced to respond to German trade surpluses either by forcing up unemployment or by forcing up consumption, and so running the large trade deficits that corresponded to Germany’s trade surplus. No other choice was possible.

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A revolution is not a dinner party. Thoughts about the future of China

This is a follow-up to Will China collapse? (5 August 2008).

Recent analysis:

  1. Get ready for lower Chinese growth“, Michael Pettis, op-ed in the Financial Times, 29 July 2009
  2.  “The spend is nigh“, Economist, 30 July 2009 — “The second article in our series on global rebalancing asks whether China can reduce its trade surplus by consuming more.”
  3. China’s economic policy: A ‘Great Wall’ or Capuan complacency?“, Arthur Kroeber, Financial Times, 11 August 2009 — See excerpt below.
  4. Excerpt from The Coming Collapse of China, Gordon G. Chang — See excerpt below.

Quote of the decade about China

Secondly, a revolution is not a dinner party, or writing an essay, or painting a picture, or doing embroidery; it cannot be so refined, so leisurely and gentle, so temperate, kind, courteous, restrained and magnanimous. A revolution is an insurrection, an act of violence by which one class overthrows another.
— Mao tse-tung, “”Report on an Investigation of the Peasant Movement in Hunan”, March 1927

(3)  China’s spirit is not a Great Wall

China’s economic policy: A ‘Great Wall’ or Capuan complacency?“, Arthur Kroeber, Financial Times, 11 August 2009 — Excerpt:

The Romans bounced back from calamity because they had a resilient set of alliances based on well-developed political and economic ties and a constitutional system that enabled a broad array of talent to come forward and express itself. No error lasted too long unchecked.

… China’s ability to maintain economic growth of around 8% despite the global shock took many by surprise. But this ability has nothing to do with systemic advantages, a distinct “China model” of growth, or skill in macroeconomic management.

… China’s present economic vitality results from a Great Wall all right – a Great Wall of borrowed cash. There is nothing remarkable or spiritual about an economy growing at 8 per cent when credit is allowed to expand by 34%.

The fact becomes even less remarkable when we recognise that nominal GDP (the appropriate comparator for nominal credit growth) grew just 3.8% in the first half. In other words, 10 dollars of new loans were required to generate just one dollar of economic growth.

In fact China’s first-half growth shows one thing and one thing only: the existence of a powerful state with the ability to commandeer its citizens’ wealth and plough it into more buildings, bridges and roads, with no regard for the return those investments will bring.

(4)  Excerpt from The Coming Collapse of China, Gordon G. Chang (2001)

There are plenty of Chinese this evening, but nothing is horrible and no one is sad. If anything, some are a bit too merry. The crowd, numbering in the hundreds, is boisterous as free-flowing liquor enlivens the revelers on the rooftop terrace of Shanghai’s historic Peace Hotel. The city around them is sparkling, floodlit in clashing colors against a pitch black sky, and the Huangpu River just below is bustling with commerce even at this late hour.

On the roof this perfect evening the wealthy and the famous mingle with Shanghainese on the make; pride, arrogance, and envy all on display. Personalities in black tie chat with gentlemen in long gray robes, and women in floor-length gowns mix with friends in tight-fitting qi pao split almost to the waist.

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