hit because of the market crash.
There is a larger issue for the Chinese economy about its ability to convert from an investment- and trade-driven economy to one driven by consumption. This is not an easy task, and it would not be surprising if China finds it difficult. I’ll leave it to people who are more expert than me to give odds, but we can say a bit about the impact on this switch (or its failure) on the US.
From the standpoint of the US economy, the main impact of a failed transition in China will be an increase in its trade surplus. A lower-valued Chinese currency will mean that it exports more and imports less. Also, slower GDP growth will be a drag on its imports. If we assume that this increase in trade surplus is shared evenly between the US, Europe and the rest of the world, this implies an increase in the US trade deficit of roughly $70 billion. If we assume a multiplier on 1.5, that will reduce GDP growth over the next year by $105 billion, or a bit less than 0.6 percent.
A 0.6 percentage point hit to GDP is hardly trivial, but not the sort of thing that gives us another recession. I suppose the shift in China’s trade surplus could be even larger, but it is hard to imagine it would be too much larger.
It is also worth making a point that should be obvious: This is all a story of inadequate demand. In other words, our big problem is that we are not spending enough money. I know it would be wonderful if companies went on an investment spree, but this is not likely to happen.
This leaves trade and government spending as potential sources for increased demand. The trick to improving our trade balance is a lower-valued dollar. That’s a good long-term story, but hard to see much in this direction at the moment, with most other countries’ economies looking weaker than ours.
That leaves the big bad government: If we want more demand, it will have to come from the government paying for evil things like infrastructure, education, healthcare and green energy. But we all know weak growth and more unemployment is the better way to go.
This article has been excerpted from: ‘The stock market is not the economy’.
Courtesy: Commondreams.org