trade gap generated ???
relative euro price levels central ???
use the krug parable of china and america
" Anyway, imagine for simplicity that America and China are the only two countries in the world. And imagine that as consumer habits change, American spending falls by $400 billion while Chinese spending rises by $400 billion. Trade imbalance gone, right?
No, it’s not that easy. If US residents cut spending by $400 billion, most of that reduction — say 75 percent — will come in reduced spending on US-produced goods and services (even that Chinese pair of pajamas you buy at WalMart has a lot of US value-added in distribution and retailing.) So that’s $300 billion in reduced demand for US output. Meanwhile, a much smaller fraction — say 15 percent — of that extra Chinese spending will fall on US goods. So we’re talking about, say, a $240 billion net fall in spending on US goods and services; correspondingly, we’re talking about a $240 billion rise in demand for Chinese goods and services.
If that’s the end of the story, then the spending shift produces a depressed economy in America and major inflationary pressures in China.
What’s needed to make it come out right is something to make both American and Chinese consumers switch some of their spending toward American goods — something like a rise in the dollar value of the yuan, which makes Chinese goods relatively more expensive. So the redistribution of world spending and exchange rate adjustment are complements, not substitutes.
Now, what matters is the relative price of Chinese and American goods, so there’s another way to get there — a combination of inflation in China and deflation in America. But that’s unpleasant on both sides.
Worse, what if China tries to head off inflation by raising interest rates while America can’t reduce rates, since it’s already at the zero lower bound? Then the result is contractionary for the world as a whole."
now if absolute prices were flexible ...
but with nominally fixed debt structures
the nominal reduction in yank product prices
"required " for adjustment
creates added debt weight to yank domestic outfits
now this is with only domestic currency denominated debts
add in cross debt burdns and now the deal gets hairy
the fact uncle borrows in his own dollars removes this added complexity of course
use the krug parable of china and america
" Anyway, imagine for simplicity that America and China are the only two countries in the world. And imagine that as consumer habits change, American spending falls by $400 billion while Chinese spending rises by $400 billion. Trade imbalance gone, right?
No, it’s not that easy. If US residents cut spending by $400 billion, most of that reduction — say 75 percent — will come in reduced spending on US-produced goods and services (even that Chinese pair of pajamas you buy at WalMart has a lot of US value-added in distribution and retailing.) So that’s $300 billion in reduced demand for US output. Meanwhile, a much smaller fraction — say 15 percent — of that extra Chinese spending will fall on US goods. So we’re talking about, say, a $240 billion net fall in spending on US goods and services; correspondingly, we’re talking about a $240 billion rise in demand for Chinese goods and services.
If that’s the end of the story, then the spending shift produces a depressed economy in America and major inflationary pressures in China.
What’s needed to make it come out right is something to make both American and Chinese consumers switch some of their spending toward American goods — something like a rise in the dollar value of the yuan, which makes Chinese goods relatively more expensive. So the redistribution of world spending and exchange rate adjustment are complements, not substitutes.
Now, what matters is the relative price of Chinese and American goods, so there’s another way to get there — a combination of inflation in China and deflation in America. But that’s unpleasant on both sides.
Worse, what if China tries to head off inflation by raising interest rates while America can’t reduce rates, since it’s already at the zero lower bound? Then the result is contractionary for the world as a whole."
now if absolute prices were flexible ...
but with nominally fixed debt structures
the nominal reduction in yank product prices
"required " for adjustment
creates added debt weight to yank domestic outfits
now this is with only domestic currency denominated debts
add in cross debt burdns and now the deal gets hairy
the fact uncle borrows in his own dollars removes this added complexity of course
