麦克阿瑟将军告别演讲

Andy Xie: Good Tidings in 2011The global economy may be coming up for a breach of fresh air in 2011. Fiscal and monetary policies around the world have been highly stimulated for three years. The additional monetary and fiscal stimulus measures by the U.S. could generate an upside surprise to its 2011 growth rate. Most emerging economies continue to grow rapidly. By the middle of 2011, most analysts may declare that the world has finally put the financial crisis behind.The reality is quite different. The global economy is kept afloat by massive monetary and fiscal stimulus around the world. The main problem in the global economy – high costs and declining competitiveness in the developed world, and inflation plus asset bubbles in the developing world continue unabated. Either inflation in the developing world or unsustainable sovereign debt in the developed world will spark the next crisis.China has an opportunity to gain immunity against the next crisis.The last crisis started in the U.S. If China hadn't reformed a decade ago, it could have started in China. An economic crisis in China would have prolonged the U.S.'s economic cycle by bringing down oil and other commodity prices, which would have improved the U.S.'s cash flow.The most likely candidates to trigger the next global crisis are the U.S.'s sovereign debt or China's inflation. When one goes down first, the other can prolong its economic cycle. China may have won the last race. To win the next one, China must tackle its inflation problem, which is ultimately a political and structural issue, in 2011. If China does, the U.S. will again be the cause for the next global crisis. China will suffer from declining exports but benefit from lower oil prices.On the other hand, if China has a hard landing, the U.S.'s trade deficit can drop dramatically, maybe by 50 percent, due to lower import prices. It would boost the dollar's value and bring down the U.S.'s treasury yield. The U.S. can have lower financing costs and lower expenditures. The combination allows the U.S. to enjoy a period of good growth.One could describe the global economy as a race between the U.S. and China, to see who goes down first.This coming year is China's opportunity.The Obama administration just passed a big tax reduction bill. This is happening even as the U.S. already has a massive fiscal deficit and the national indebtedness is the highest since the World War II. The Fed just reemphasized its commitment to QE 2. It has made its intention crystal clear: As long as the unemployment rate is high and inflation rate is low, it will continue with QE.I have argued several times before why the U.S.'s stimulus won't bring lasting growth. I'm not sure that the stimulus advocates in the U.S. believe what they say. The real intention for the new Obama tax cut is to get him re-elected in 2012. The mid-term election this year shows that, unless the U.S.'s unemployment rate drops significantly, he will lose hisre-election bid then.The Fed's intention, I think, is to inflate away the U.S.'s debts. The U.S.'s household sector needs to cut its leverage by half to become normal again. If it is done through saving more, the U.S. economy will be weak for a long time, which would keep the fiscalrevenue low and the government deficit out of control. The U.S. could slide into a vicious spiral. If the Fed manages to bring it down through inflation, the U.S. economy may escape such a fate.Inflation is good for the U.S., because foreigners own nearly 100 percent of its GDP in financial assets. With its massive U.S. debt holdings, China will suffer especially hard. Indeed, if China's foreign exchange reserves evaporate in value, it becomes very vulnerable, unless its structural problems are solved.Regardless of how one views the intentions and effectiveness of the U.S.'s policies, they lead to a good environment in 2011 for China to tackle its inflation problem without worrying about a big growth slowdown.Stability, not fast growth, is China's priority.China's nominal GDP may reach US$ 6 trillion in 2010. If it rises at 10 percent per annum in the next decade, half as much as in the past decade, it would reach US$ 15.6 trillion by 2020, rivaling the U.S.'s GDP today. Stable growth, rather maximum growth at high risk is now in China's best interest.Some analysts argue that a developing country must go through a period of breakneck and unbalanced growth for it to jump out of poverty. I share this view. For most developing countries, they need to spend as much on infrastructure and increasing manufacturing capacity as possible. The conventional view on investment efficiency doesn't apply to developing countries. But, China has jumped through already. "Steady as she goes," can bring China into the developed world in the foreseeable future.Now is not the time for China to take on too much risk for maintaining growth. Even a six percent growth rate is good enough for China. China should err on the conservative side in the trade off between growth and stability.A big financial crisis is never about an innocent mistake. It is often due to policies that prolong the economic cycle while avoiding necessary structural changes. For the developed world, the fundamental problem is that its high cost society built after World War II isn't sustainable in the age of globalization, because its labor income is being pulled down by globalization, which decreases fiscal revenue for supporting the welfare society. Greenspan's bubble-prone liquidity policy gave incentive to the U.S.'s household sector to defend its lifestyle through increasing debt, which covered up the underlying structural problem for a decade.The European sovereign debt crises are due to the same force. The Southern European countries were hit especially hard during the past decade of globalization. They were quite dependent on labor intensive manufacturing before. As these industries were wiped out, they turned to government largesse to sustain their living standards. The establishment of the euro allowed these countries to borrow at the German interest rate, which made the debt problem manageable for the time being. When the market saw through them, they had to pay third world interest rates. They must cut their public expenditures dramatically to stay solvent.The U.S. is dealing with its consequences of its financial crisis by running up government debt. It is doing what some European countries have been doing. Of course, the Fed can monetize the government debt, i.e., the U.S. doesn't have to beg for help to deal with its public debt in the future. But, printing money on such a scale will likely lead to the totalcollapse of the dollar's value, like the Russian ruble in 1998, and result in hyperinflation. While hyperinflation is beneficial to the U.S. by wiping clean its foreign debt, the dollar will forever lose its reserve currency status that might be worth three percent of GDP per annum and over half of GDP in present value. The U.S. may not gain from such a solution. Developing economies are suffering from inflation and asset bubbles. Globalization is bringing unprecedented amounts of capital into them as multinational corporations move to arbitrage the cost difference between developed and developing world. The low interest rates in the former have also sparked hot money flow into the later. Some inflation in the developing world is inevitable.The asset bubbles are even more serious for the developing world. Globalization has brought prosperity to the developing world, but not evenly across their populations. The ones that hold jobs that the developed world still has enjoy first world wages. Those who compete against others in the developing world only receive third world wages. The former group pays less their counterparts in the developed world for living and has big savings to buy assets. It leads to rising asset prices. The governments are attracted by it as an easy revenue source. Hence, they support the bubbles.The inflation and bubbles in the developing world are not yet destabilizing because the dollar is weak and the hot money supports their currency values. Historically, inflation becomes a crisis in the developing world when the dollar turns around and appreciates. However, it is possible for inflation to create a crisis without a currency crisis. It erodes the purchasing power of the people at the bottom. Social unrest can lead to political crisis. China must address its property bubble.China's inflation problem stems from the country's rapid monetary growth in the past decade. That is due to the need to finance a vast property sector, which is, in turn, to generate fiscal revenues for local governments to finance their vast expenditure programs. Unless something is done to limit local government expenditure, China's inflation problem is likely to get out of control.The government now recognizes inflation as the country's main challenge. It has raised interest rates once, deposit reserve ratios several times, and announced its intention to introduce price controls. The barrage of unconventional measures is due to the belief that China's economy is different from others and the conventional measure of raising interest rates may not be effective or necessary. The reluctance to change the price of money and the willingness to change the price of goods and services has not worked well so far. Many in China argue that it is better to control the quantity of money rather than price. The price and quantity are two sides of the same coin. For the quantity measure to be effective, it needs to bring down inflation dramatically. A powerful government could make the quantity policy work by limiting credit expansion and forcing down the prices of goods and services. The Chinese government is trying to do exactly that.The policy's effectiveness is quite limited so far. The government has been targeting credit expansion for the past year. But, the credit expansion outside of the system has made up for the slowdown within. For example, banks can sell corporate loans to their depositors directly, shrinking its balance sheet to meet the government's target. But, nothing has changed in reality. Fitch documented this phenomenon in its recent report.The ineffectiveness of the recent measures casts doubts on the government's sincerity infighting inflation. The constant and marginal policy announcements could be interpreted that the inflation fighting is now largely a propaganda job. Such perceptions could spark popular panic, which would cause the household sector to hoard goods like rice and cooking oil. When the masses flee from holding money, a full blown crisis will unfold.I have been arguing for increasing interest rates. That won't cure inflation either. It is meant to compensate depositors to sustain the value of their wealth. It can prevent social unrest. To cure inflation, China must deal with government expenditures. Unless it is restrained, inflation will continue and keep rising.There are two ways to limit local government expenditure. One is to cut their funding source. Their main revenue sources are land sales, property taxes, and bank loans. The last source is drying up a bit, as banks are saddled with high exposure to the sector already and are trying to decrease it. This change isn't biting yet because local governments haven't spent all the money they borrowed before.Deflating the property bubble will have a bigger effect on local government funding. Last year, new property sales reached 14 percent of GDP. The money went one way or another into the government's coffers. Considering the pace of the property market growth local governments expect much more from it in the future. They have planned their expenditures accordingly.The property under contraction may be worth half of China's 2010 GDP. The land banks that the property developers hold and local governments have prepared could build properties worth considerably more. If all these properties are sold at the current prices, the money supply needs to expand rapidly, at least continuing the 20 percent per annum pace of the past eight years, i.e., money supply doubling every four years. Runaway inflation is inevitable in such a scenario.One could play games with the money supply statistics by limiting the quantity under the formal definition while leaving loopholes for credit expansion through other channels. It won't change the reality. Inflation will continue to rise even when the government reports slower monetary growth.Only when property prices drop sharply can we believe that the government is serious about fighting inflation. The level of property prices defines how much local governments can spend. Fighting the property bubble is a must for fighting inflation. As long as property price remains elevated, fighting inflation must be a show only.Is the solution to the problem is to cut off funding for local governments? I'm not sure. China's local governments are so powerful that they can decisively influence the national policies and find new ways to raise revenues. Without reforming the local governments China's inflation problem may not be solvable.While conspiracy theories are very popular in China, the reality is that only a bad mistake by itself can cause a big crisis. China is so large and so popular among multinational corporations that it has numerous advantages in the today's world. The international environment is a big plus for the country. Only a big mistake by itself can trigger a crisis. China has a strong government. The household sector or the business sector lives in the shadow of the government. Only the government system malfunctioning can cause a crisis to bring down the economy. Runaway government expenditure is a clear and present danger to the country. The coming year provides a great opportunity for China todeal with the problem. But, if China lets the property bubble grow, as has happened under previous circumstances, China could suffer a hard landing in 2012. It could unsettle China's development path like so many times in the past century.。