Trade

Coppola agrees on the problem with Baker.

"The US trade deficit is pretty intractable largely because the two major surplus countries - China and Germany - do not have currencies that float with respect to the USD. Germany uses the Euro, which does float, but the Euro is persistently undervalued relative to fundamentals in Germany because of the presence of weaker countries in the union. If the currency cannot adjust, then neither the trade deficit nor the capital surplus can correct unless unit labour costs fall, which means very significant falls in wages and employment costs. This is what is happening in the Eurozone periphery: it has not happened in the US thus far because of the US's willingness to borrow and the world's willingness to lend to it. 

However, there is a cost. As Philip Booth points out, China will not be able to suppress inflation forever if its currency is under-valued. Germany, too, faces high inflation relative to others in the Eurozone if its economy is  out of equilibrium: the ECB's tight money policies keep German inflation below 2%, but this forces weaker countries into outright deflation. "

Makes sense as ruling class policy: keep the labor market loose and increase the capital share and incentivize Germany to ally with us against Russia and to pay off China.

And yet she sees Baker's solution as unlikely: "This is why devaluing the dollar would not necessarily reduce the US's trade deficit, as Dean Baker thinks: China would simply adjust the yuan to maintain its desired exchange value, and Germany would tighten fiscal policy to stop a fiscal deficit developing as a consequence of a falling trade surplus in a low-demand economy. The only way to resolve the currency problem is for China to allow the yuan to float and Germany to abandon austerity. Hell might freeze over first. "

Inflation should be building in Germany and China.

China and job creation

China's Central Bank Announces Job Creation Program for the United States by Dean Baker

That may be a bit of an overstatement, but the comments from Yi Gang, a deputy governor at China's central bank, deserved much more attention than they received. According to Bloomberg, YI announced that the bank would no longer accumulate reserves since it does not believe it to be in China's interest. The implication is that China's currency will rise in value against the dollar and other major currencies.

This could have very important implications for the United States since it would likely mean a lower trade deficit. Since other developing countries have allowed their currencies to follow China's, a higher valued yuan is likely to lead to a fall in the dollar against many developing country currencies. A reduction in the trade deficit would mean more growth and jobs. If the deficit would fall by 1 percentage point of GDP (@$165 billion) this would translate into roughly 1.4 million jobs directly and another 700,000 through respending effects for a total gain of 2.1 million jobs.

Since there is no politically plausible proposal that could have anywhere near as much impact on employment, this announcement from China's central bank is likely the best job creation program that the United States is going to see. It deserves more attention than it has received.

German current account balance & Euro

NYT Reinvents History of Euro Crisis by Dean Baker
15 November 2013 06:09

The Money Trap by Krugman
Nov. 14, 2013


latest German current account balance linklist

German current account balance updated linklist

One list to rule them all! (updated)

German Trade Balance Isn't About Hard Work by Yglesias
Nov. 14, 2013

Europe’s (Low) Inflation Problem by Krugman
Nov. 13, 2013 9:15 p.m.

German Economists Exist to Make Economists Elsewhere Look Good by Dean Baker
Nov. 13, 2013 14:59

In a Good World, Would We Have to Deal with “Global Imbalances”? by DeLong
Nov. 13, 2013  7:45 a.m.

Germany’s Neighbors Admonish It Over Surplus
Nov. 13, 2013

Pressure Is on Germany to Narrow Its Trade Gap
Nov. 12, 2013

Germany’s Lack of Reciprocity by Krugman
Nov. 12, 2013 1:26 a.m.

Europe’s Macro Muddle (Wonkish) by Krugman
Nov. 11, 2013

Sadowski on sterilization
Nov. 4 at 1:34 pm

How Do Those Germans Do It and What Does it Mean for the US? by Jared Bernstein
Nov 04, 2013 at 12:12 pm

China and the EU: Beggaring Neighbors by Dean Baker
Sunday, 03 November 2013 16:26

Eureka! Paul Krugman Discovers the Bank of France by David Glasner
November 3, 2013

The real problem with German macroeconomic policy by Simon Wren-Lewis
Sunday, 3 November 2013

Blame Germany, or Frankfurt? by Ryan Avent
Nov 3rd 2013, 21:41

Europe’s Inflation Problem by Krugman
November 4, 2013, 10:20 am 

The Changing Geography of Beggar-thy-Neighbor by Krugman
November 3, 2013, 3:16 pm

German Surpluses: This Time Is Different by Krugman
November 3, 2013, 6:41 am

Those Depressing Germans by Krugman
November 3, 2013

Is the Paradox of Thrift Actually a Paradox? by Henry Farrell
Nov. 2, 2013

France 1930, Germany 2013 by Krugman
November 2, 2013, 6:00 pm

Sin and Unsinn by Krugman
November 2, 2013, 4:35 pm 

Germany's Export Obsession Is Dooming Europe to a Depression by Matt O'Brien
Nov 2 2013, 9:30 am

Defending Germany by Krugman
November 2, 2013, 9:23 am

Fawlty Europe: Will the European Commission dare to utter the unmentionable to the Germans? by Charlemagne (The Economist)
Novemeber 2, 2013

More Notes On Germany by Krugman
November 1, 2013, 4:54 pm

The Harm Germany Does by Krugman
November 1, 2013, 11:41 am

Germany’s Blind Spot by New York Times Editorial Board
October 31, 2013

Raw Nerve: Germany Seethes at US Economic Criticism  By Christopher Alessi (Spiegel Online)
October 31, 2013 – 06:26 PM 

U.S. Accuses Germany of Causing Instability by Sarah Wheaton
October 30, 2013

Semiannual Report on International Economic and Exchange Rate Policies by U.S. Treasury
October 30, 2013

Germany and global imbalances

German Economists Exist to Make Economists Elsewhere Look Good by Dean Baker
Nov. 13, 2013

Europe’s (Low) Inflation Problem by Krugman
Nov. 13, 2013

Germany current account balance linklist

Part of why this is coming up is that Merkel and the Christian Democrats are in negotiations to form a coalition government with the Social Democrats who are demanding concessons.

global imbalances

In a Good World, Would We Have to Deal with “Global Imbalances”? by Brad DeLong

German Economists Join Country’s Chorus of Critics

Pressure Is on Germany to Narrow Its Trade Gap


other links

trade deficit

Taking Aim at the Wrong Deficit by Jared Bernstein and Dean Baker

Japan's current account balance

Japan's Missing Wall of Money by  Thomas Klitgaard

Market commentary at that time suggested that flooding the economy with liquidity would lead to a “wall of money” flowing out of Japan in search of higher yields, affecting asset prices worldwide. So far, however, Japan’s wall of money remains missing in action, with no pickup in Japanese foreign investment since the April policy shift....

...The Bank’s asset purchase program set off no wall-of-money outflow from Japan. Instead, funds were brought back into the country.

Cross-border inflows and outflows typically move in tandem because net financial flows are tied to the current account balance. There could be a surge in outflows if the current account surplus were also to surge, but current account balances tend to be sticky. The weakening in the yen since the April meeting will boost exports, but it will also boost import prices in yen terms, leaving Japan’s current account balance largely unaffected. Given the stickiness of the current account, there can be no wall of money flowing out of Japan without a wall of money flowing into Japan.

(via Thoma)