WEBVTT - How Financial Repression in China Helped Cause the Trade War 0:00:11.960 --> 0:00:15.320 Hello, and welcome to another episode of the All Thoughts podcast. 0:00:15.400 --> 0:00:19.160 I'm Tracy Allaway and I'm Joe. Wisn't thal so, Joe. 0:00:19.280 --> 0:00:21.840 You know, there's a very very important date coming up. 0:00:23.160 --> 0:00:28.360 Mm hmm what is it. I'll give you a hint. 0:00:28.680 --> 0:00:33.720 It's in October. Oh, right, of course. Uh, major major 0:00:33.760 --> 0:00:35.760 deadline for the trade tariff. It took me a second, 0:00:35.760 --> 0:00:40.159 I'm sorry. Yes, those are always happening. But there's a 0:00:40.240 --> 0:00:43.720 date that's even more important, and it's actually really important 0:00:43.800 --> 0:00:47.920 for the US China trade war. But it's October one, 0:00:48.880 --> 0:00:52.479 and that is the National Day of the People's Republic 0:00:52.479 --> 0:00:55.880 of China. And this year it's even more important than 0:00:56.000 --> 0:01:00.040 usual because it's the seventieth anniversary of the founding of 0:01:00.080 --> 0:01:04.640 the PRC ah Okay that that I didn't realize, Okay, 0:01:04.680 --> 0:01:07.360 And this tends to be a sort of politically sensitive 0:01:07.480 --> 0:01:10.679 date for the Chinese authorities. It usually comes with a 0:01:10.680 --> 0:01:14.679 big military parade and they seed the clouds to a 0:01:14.680 --> 0:01:16.800 couple of days before to make sure that the skies 0:01:16.840 --> 0:01:20.000 are blue. And it's a big, huge holiday, but it's 0:01:20.080 --> 0:01:24.200 also a chance for the authorities to sort of evaluate 0:01:24.520 --> 0:01:28.640 or more likely, um sort of crow about everything. They've 0:01:28.680 --> 0:01:32.760 done to improve China, including the economy. I like how 0:01:32.800 --> 0:01:34.759 you just sort of casually throw in there that they 0:01:34.760 --> 0:01:38.200 affect the weather for the day. Yeah, it's really interesting. 0:01:38.280 --> 0:01:41.320 Everyone knows it's going to be good weather on October one. 0:01:41.720 --> 0:01:44.880 That's amazing. So I thought, in connection with the October 0:01:45.040 --> 0:01:49.120 first state, we could talk about how far China has 0:01:49.320 --> 0:01:52.520 or hasn't come when it when it comes to the 0:01:52.560 --> 0:01:56.920 goal of rebalancing their economy. Right, And this is something 0:01:56.920 --> 0:01:59.480 that people have been talking about for a long time 0:01:59.560 --> 0:02:03.440 because people look at the Chinese economy and they see, 0:02:03.520 --> 0:02:06.520 at least on the service all kinds of crazy things 0:02:06.600 --> 0:02:12.360 going on. There's very historically, there's been extreme fluctuations and 0:02:12.400 --> 0:02:16.880 asset prices, real estate prices, claims of real estate bubbles, 0:02:17.200 --> 0:02:22.040 an economy extremely geared towards investment, and so forth. And 0:02:22.120 --> 0:02:25.359 so people look at an economy that's grown extraordinarily, well, 0:02:25.680 --> 0:02:28.280 that's brought all kinds of wealth to people over the 0:02:28.360 --> 0:02:31.240 last several decades, going from one of the poorest countries 0:02:31.280 --> 0:02:33.679 in the world to uh, you know, building up this 0:02:33.800 --> 0:02:38.320 significant middle class. But they still see extraordinary imbalances and 0:02:38.400 --> 0:02:42.560 skewed forces domestically. That's right, and The big one is, 0:02:42.600 --> 0:02:46.640 of course, the the imbalance between an investment driven economy 0:02:46.800 --> 0:02:49.799 on the way to becoming more of a consumption driven economy. 0:02:49.880 --> 0:02:53.320 That's the big one. And to talk about this, we 0:02:53.320 --> 0:02:56.160 we really have the perfect person are. Our guest for 0:02:56.200 --> 0:02:59.960 today is Michael Pettis. He's finance professor over at Packing 0:03:00.080 --> 0:03:04.799 University and also senior Fellow at the Carnegie Endowment. He's 0:03:04.840 --> 0:03:08.760 also a former banker and a trader and has been 0:03:08.800 --> 0:03:12.440 watching exactly this and writing about it for a very, 0:03:12.560 --> 0:03:15.120 very long time. So we're very happy to have Michael 0:03:15.280 --> 0:03:17.400 on the show today. I can't wait. I've been I've 0:03:17.400 --> 0:03:20.760 been wanting us to have a podcast with an episode 0:03:20.760 --> 0:03:22.799 with Michael for a long time, So really looking forward 0:03:22.840 --> 0:03:26.600 to jumping into this one. Yeah, no pressure, Michael, Thank 0:03:26.600 --> 0:03:30.880 you so much for coming on. My pleasure. So maybe 0:03:31.000 --> 0:03:32.880 just to begin with, we we could talk a little 0:03:32.880 --> 0:03:35.560 bit about what we mean when we talk about an 0:03:35.600 --> 0:03:40.360 investment driven economy versus a consumption driven economy. What does 0:03:40.400 --> 0:03:42.680 that actually mean and how does it pertain to the 0:03:42.720 --> 0:03:46.760 case of China. An investment driven economy can also be 0:03:46.800 --> 0:03:50.160 thought of as a savings driven e company, and China 0:03:50.280 --> 0:03:53.200 is not the only country that's followed this growth model 0:03:54.080 --> 0:03:57.120 at least two dozen countries that since the Second World War, 0:03:57.840 --> 0:04:00.320 and you could argue that this model was more less 0:04:00.360 --> 0:04:04.080 invented in the nineteen thirties in the Soviet Union, but 0:04:04.200 --> 0:04:08.360 basically in a consumption driven economy, and the classic case 0:04:08.440 --> 0:04:11.280 that is probably the United States in the nineteenth century. 0:04:12.000 --> 0:04:15.880 Um you had very high wage levels. It was high 0:04:15.920 --> 0:04:19.800 wages that drove high levels of comment, which then drove 0:04:20.560 --> 0:04:24.440 high levels of investment to those consumption needs. And it 0:04:24.520 --> 0:04:27.800 also grow productivity growth and a bunch of other things. 0:04:27.839 --> 0:04:30.960 In in the savings economy, what you do is you 0:04:31.040 --> 0:04:34.320 force up the savings rate, which is usually a good 0:04:34.320 --> 0:04:37.800 thing to do in a developing country because developing countries 0:04:37.920 --> 0:04:41.919 tend to have insufficient investment, and they tend to have 0:04:41.960 --> 0:04:45.640 insufficient investment because they have insufficient domestic savings. So you 0:04:45.680 --> 0:04:49.279 force up the savings rate in order to increase the 0:04:49.320 --> 0:04:53.360 amount of savings that are available for domestic investment, and 0:04:53.440 --> 0:04:57.560 you can get very, very rapid growth as long as 0:04:57.600 --> 0:05:00.520 you continue to be under invested in that's really the 0:05:00.600 --> 0:05:05.720 problem in China in the nineties, China had gone through 0:05:05.839 --> 0:05:09.840 five decades of Maoism, the Civil War and anti Japanese war, 0:05:10.520 --> 0:05:13.680 and it was hugely under investment for its level of development, 0:05:13.680 --> 0:05:17.560 for its for its the its ability to absorb investment productively. 0:05:18.360 --> 0:05:21.240 And so a model found that really focused on pushing 0:05:21.279 --> 0:05:24.960 up investment as rapidly as possible was the right model. 0:05:25.400 --> 0:05:27.760 And for that you have to push up the savings rate. 0:05:27.800 --> 0:05:31.000 And here's what I think. There's a huge amount of 0:05:31.320 --> 0:05:35.440 misconception about China. China, as everyone knows, that's the highest 0:05:35.440 --> 0:05:38.360 savings rate in the world. But that's not a cultural 0:05:38.440 --> 0:05:40.760 propensity to save. It's got nothing to do with what 0:05:40.880 --> 0:05:44.880 households want to do. China has the highest savings rate 0:05:44.960 --> 0:05:48.680 in the world because it has the lowest household share 0:05:48.839 --> 0:05:53.520 of GDP. In other words, they produced a hundred dollars 0:05:53.560 --> 0:05:58.520 of GDP and their total compensation is roughly fifty dollars, 0:05:58.520 --> 0:06:02.800 and so of course their consumption is less than that. 0:06:02.800 --> 0:06:05.680 That's why China has such a low consumptions and such 0:06:05.720 --> 0:06:09.960 a high saving ship. Now, this is a great model 0:06:10.080 --> 0:06:12.840 when you have significant amount of investment that you need 0:06:12.880 --> 0:06:17.200 to do when you're severely under invested economy, which China 0:06:17.360 --> 0:06:20.840 was in the eighties and nine nineties. But at some point, 0:06:20.960 --> 0:06:22.760 perhaps at the end of the nineties or beginning of 0:06:22.800 --> 0:06:27.159 the two thousand's trying to reach the level of investment 0:06:27.240 --> 0:06:30.800 that it could productively absorb. And and in that case, 0:06:30.880 --> 0:06:32.719 what it should have done is that could have switched 0:06:32.720 --> 0:06:36.320 this growth model towards more of a consumption driven growth model, 0:06:36.760 --> 0:06:39.760 and that's what has been trying to do. But the 0:06:39.760 --> 0:06:42.000 the the important point to remember is that if you 0:06:42.080 --> 0:06:47.120 want the consumption share of GDP to grow, then you've 0:06:47.160 --> 0:06:50.600 got to get the household income fare to grow. And 0:06:50.640 --> 0:06:52.680 if you want the household incomes share to grow, you've 0:06:52.680 --> 0:06:56.120 got to reduce someone else's share. And that's why it's 0:06:56.120 --> 0:07:01.120 such a politically difficult problem for China. So, Michael, you've 0:07:01.160 --> 0:07:05.800 been writing about this problem or this challenge for China 0:07:06.040 --> 0:07:10.040 for several years, and I went back, I was over 0:07:10.080 --> 0:07:13.640 the weekend doing so propriating your book from You're like, 0:07:13.680 --> 0:07:17.800 it's pretty clear that in the coming years they're reaching 0:07:17.880 --> 0:07:22.040 the absolute limits to the existing investment driven model. They 0:07:22.080 --> 0:07:24.760 have to make the change now, because if they don't 0:07:24.800 --> 0:07:28.880 make it gradually, it's going to be a painful adjustment. Eventually, 0:07:29.600 --> 0:07:33.000 explain to us the sort of specific mechanism by which 0:07:33.040 --> 0:07:36.160 the investment driven growth model has to come to an end. 0:07:36.200 --> 0:07:39.120 Why it can't last forever, why it uh, why it 0:07:39.200 --> 0:07:42.480 must run into a wall? And then since then, like 0:07:42.520 --> 0:07:45.560 in recent years and before the trade war. So before 0:07:45.600 --> 0:07:47.640 we get to like the sort of immediate stuff, how 0:07:47.720 --> 0:07:52.960 has China done with its domestic rebalancing in your view models, 0:07:53.040 --> 0:07:55.960 But lean have significant amounts of productive investment that you 0:07:56.040 --> 0:07:58.760 need to do. And the way it works, since you 0:07:58.840 --> 0:08:03.080 borrow dollars, you invested in building a factory, of building 0:08:03.080 --> 0:08:06.720 a road, building bridge, that increases the value of the 0:08:06.760 --> 0:08:10.560 economy by a hundred and ten dollars. So you're fine, 0:08:10.960 --> 0:08:14.160 your debt's going up, but your your debt burden is 0:08:14.200 --> 0:08:17.960 actually going down. That's healthy growth. But when you reach 0:08:18.040 --> 0:08:21.000 the point at which you can no longer absorb all 0:08:21.000 --> 0:08:24.480 of this investment productively, So again, you borrow a hundred dollars, 0:08:24.640 --> 0:08:28.360 you build something, but there's something only creates twenty dollars 0:08:28.360 --> 0:08:31.560 worth of value for the economy. Now you have a 0:08:31.600 --> 0:08:35.040 hundred dollars of additional debt, but only twenty dollars of 0:08:35.040 --> 0:08:38.280 additional debt service and capacity. So now your debt burden 0:08:38.400 --> 0:08:41.600 is growing, and that's you know, you can argue it's 0:08:41.640 --> 0:08:43.720 been this has been the case of the last ten years, 0:08:43.720 --> 0:08:46.360 of the last twenty years or whatever. It's certainly been 0:08:46.360 --> 0:08:49.720 the case. And that's why China. China's debt burden has 0:08:49.800 --> 0:08:54.920 exploded to becoming among the highest developing countries. What do 0:08:54.920 --> 0:08:57.600 we think about China's debt burden at the moment, because 0:08:57.600 --> 0:09:01.520 we've had China bears warning about it for I mean, 0:09:01.840 --> 0:09:05.680 over a decade at this point. And yet even though 0:09:05.720 --> 0:09:09.240 we we see these concerns and we see the authorities 0:09:09.320 --> 0:09:13.480 you know, occasionally try to reduce credit in the wider economy, um, 0:09:13.520 --> 0:09:15.959 they tend to give up after a couple of years, 0:09:15.960 --> 0:09:19.400 and if the economy starts to slow, they just ramp 0:09:19.520 --> 0:09:23.480 up lending again. So is this something that can keep 0:09:23.480 --> 0:09:27.360 going for for a while longer? It probably can for 0:09:27.400 --> 0:09:30.120 another two or three years. Now. There are types of 0:09:30.240 --> 0:09:33.280 China Bear warnings about the debt I would say a 0:09:33.360 --> 0:09:35.360 lot of them have looked at the debt problem said 0:09:36.080 --> 0:09:38.600 if that continues going, China will have a debt crisis. 0:09:39.160 --> 0:09:41.560 I don't think that's what the history tells us. Debt 0:09:41.559 --> 0:09:44.360 crisis one of the ways you resolve the debt problems, 0:09:44.920 --> 0:09:47.360 but another way you resolve it have failed to resolve 0:09:47.400 --> 0:09:51.840 it is through a really long, slow adjustment. So for example, 0:09:51.920 --> 0:09:56.679 Japan after never had a debt crisis, I think that's 0:09:56.720 --> 0:10:00.040 the moon likely outcome in China because that crisis it 0:10:00.120 --> 0:10:03.040 was really a balance sheet problem, it's not a debt problem. 0:10:03.080 --> 0:10:05.679 And in China, as long as the system was closed 0:10:06.280 --> 0:10:09.920 and the regulators to be powerful, um, they can always 0:10:10.000 --> 0:10:12.960 restructure liabilities, in which case you will never have a 0:10:13.000 --> 0:10:15.600 debt crisis. But that doesn't mean you won't have a 0:10:15.640 --> 0:10:19.640 debt problem. As the debt level grows, the debt itself 0:10:19.679 --> 0:10:23.600 becomes a constraint on on the future growth. And the 0:10:23.679 --> 0:10:27.360 problem is can only continue growing as long as debt 0:10:27.440 --> 0:10:31.880 continues growing even more quickly. Now we don't know where 0:10:31.920 --> 0:10:35.080 the limit to debt capacity is, but we certainly don't 0:10:35.080 --> 0:10:37.200 want to find out, and I think in Beijing there's 0:10:37.240 --> 0:10:40.160 a growing sense that wherever that limit is, we're getting 0:10:40.200 --> 0:10:43.000 awfully close to it. So we started to see in 0:10:43.080 --> 0:10:47.000 the last two years a much more serious attitude towards 0:10:47.080 --> 0:10:50.400 trying to reign in debt. They haven't done, so that 0:10:50.559 --> 0:10:53.840 continues to grow much more faster than any measure of 0:10:53.840 --> 0:10:58.480 debt servicing capacity, but at least it's improve it. The 0:10:58.760 --> 0:11:02.680 Chinese investment led growth model has been built on several 0:11:02.720 --> 0:11:09.280 foundations which keep household household spending, household consumption, household income unnaturally. 0:11:09.360 --> 0:11:14.880 Low interest rates are said artificially low, punishing or hurting savers. 0:11:14.960 --> 0:11:19.520 Savers don't have very good investment opportunities. Worker rights aren't 0:11:19.520 --> 0:11:23.800 particularly strong. There are other things built into the system 0:11:23.880 --> 0:11:27.679 that is essentially create a lot of household procarity and 0:11:27.960 --> 0:11:32.679 drive the savings rate up. Has China done anything structural 0:11:32.840 --> 0:11:36.400 in the last few years to make a meaningful change 0:11:36.600 --> 0:11:41.679 towards this domestic rebalancing in your view? You know, not, really, 0:11:41.720 --> 0:11:44.800 there has been some improvement. If you look at the 0:11:45.760 --> 0:11:51.000 consumption share of GDP, it's risen pretty significantly in the 0:11:51.080 --> 0:11:53.960 last four or five years. But there are two things 0:11:54.000 --> 0:11:57.200 that account for almost all of that growth. The first 0:11:57.240 --> 0:12:00.200 thing is just that GDP has dropped to grow than 0:12:00.280 --> 0:12:03.719 GDP has dropped significantly, so the consumption share, just as 0:12:03.720 --> 0:12:07.840 a matter of arithmetic, gets larger and larger. The second 0:12:07.840 --> 0:12:10.559 thing is, you know, there's two ways you can increase 0:12:10.720 --> 0:12:13.280 the consumption share of GDP for any country, not just 0:12:13.360 --> 0:12:18.480 for China. One way is to increase household debt. The 0:12:18.520 --> 0:12:21.920 other way is to increase the house that income share 0:12:22.040 --> 0:12:25.959 of GDP. Now four or five, China had very little 0:12:25.960 --> 0:12:30.120 household debt and since then it's really exploded. But that's 0:12:30.120 --> 0:12:32.800 not sustainable because if you're trying to solve for a 0:12:32.840 --> 0:12:36.480 debt problem, obviously additional debt isn't the way you're going 0:12:36.520 --> 0:12:39.760 to fix the problem. So we're probably reaching a limit there. 0:12:40.240 --> 0:12:43.360 What they really have to do is do the transfers. 0:12:43.400 --> 0:12:46.680 But when you go through all of the mechanics, ultimately 0:12:47.400 --> 0:12:50.520 they have to transfer well from local governments and local 0:12:50.559 --> 0:12:54.160 elites to the household sector. And there's you know, a 0:12:54.240 --> 0:12:55.920 dozen different ways you can do it, and now I 0:12:56.000 --> 0:12:57.800 have to do them all. But the problem is a 0:12:57.840 --> 0:13:00.440 political problem, and that is the local government's the local 0:13:00.480 --> 0:13:04.960 elites very very strongly resist these wealth transfers. Well, I 0:13:04.960 --> 0:13:07.760 wanted to press you on this issue, and you mentioned 0:13:07.760 --> 0:13:10.280 this already, but one thing you often hear is that 0:13:10.520 --> 0:13:16.360 the Chinese are culturally prone to excess savings, possibly because 0:13:16.360 --> 0:13:18.760 of recent history where there was a lot of turmoil 0:13:18.840 --> 0:13:22.560 in the country, possibly because of a lack of social 0:13:22.559 --> 0:13:27.560 safety net in China. So are there political solutions to 0:13:27.640 --> 0:13:34.600 this problem and what could those realistically actually be well. 0:13:34.800 --> 0:13:39.880 The key is increasing the household share of GDP. One 0:13:39.920 --> 0:13:41.960 of the ways of doing so, of course, is strengthening 0:13:42.040 --> 0:13:44.840 the social safety net, although it depends on how you 0:13:44.840 --> 0:13:48.079 pay for it. So if you strengthen the social safety 0:13:48.080 --> 0:13:51.640 net and pay for it by borrowing at negative real 0:13:51.760 --> 0:13:55.200 rates from household sector, then what you're doing is you 0:13:55.280 --> 0:13:58.120 are uh you know, with one hand you're giving them 0:13:58.160 --> 0:14:00.719 additional income in the form of the stone safety net, 0:14:01.320 --> 0:14:03.199 and with the other hand you're taking it away from 0:14:03.240 --> 0:14:05.920 them in the form of a negative return on their savings. 0:14:06.600 --> 0:14:09.480 The key is that it has to be funded by 0:14:09.559 --> 0:14:12.920 transfers from the household sector. Let me let me give 0:14:12.920 --> 0:14:16.520 a classic case of how this could happen. Very unlikely 0:14:16.520 --> 0:14:19.120 because it's politically quite difficult. But as you know, in 0:14:19.280 --> 0:14:21.840 China you have what's called the Huko system, which means 0:14:21.880 --> 0:14:25.120 that as a Chinese you're only allowed to live and 0:14:25.120 --> 0:14:27.720 work in the area for which you have a permit 0:14:27.760 --> 0:14:30.440 called the hukoh So when you think about all these 0:14:30.640 --> 0:14:34.320 migrant workers and saying Beijing, most of them here are 0:14:34.400 --> 0:14:37.880 technically illegal. Now they're allowed to work here, but the 0:14:37.920 --> 0:14:43.960 problem is they have a limited ability to access city services, schooling, medical, treatment. 0:14:44.600 --> 0:14:47.040 They have limited standing and law if they ever get 0:14:47.080 --> 0:14:51.000 into a conflict with their employers c So imagine that 0:14:51.120 --> 0:14:56.720 you eliminate the Hukoh overnight. Immediately, migrant workers would be 0:14:56.840 --> 0:15:02.800 richer because they would now have full access city services. Also, immediately, 0:15:02.880 --> 0:15:05.680 the city would be poorer because it now has to 0:15:05.720 --> 0:15:08.640 cover all of these services. This would be a classic 0:15:08.680 --> 0:15:11.600 transfer mechanism, and it's something the Chinese have been talking 0:15:11.600 --> 0:15:14.880 about for many years. It's just too politically difficult to 0:15:14.920 --> 0:15:40.520 pull it off. So let's fast forward to the present day. 0:15:40.600 --> 0:15:43.880 Because obviously, and this is something you've talked about in 0:15:43.920 --> 0:15:46.960 your writing, is that you know, the the growth model 0:15:47.080 --> 0:15:50.840 can continue even with all the dead even with all 0:15:50.840 --> 0:15:55.760 the domestic imbalances, so long as there's a significant amount 0:15:55.800 --> 0:15:59.000 of foreign demand for Chinese goods and as long as 0:15:59.000 --> 0:16:01.520 someone is out there buying in. For a long time, 0:16:01.880 --> 0:16:04.280 really for the whole world, but for China in particular, 0:16:04.400 --> 0:16:09.200 the US has been a major contributor of demand for 0:16:09.440 --> 0:16:12.400 goods of all of all sorts, and we see that 0:16:12.480 --> 0:16:16.400 now running into an obvious problem, which is President Trump 0:16:16.480 --> 0:16:19.920 and the trade war and this sort of general feeling 0:16:19.960 --> 0:16:23.000 maybe in the US that the current system is going 0:16:23.040 --> 0:16:24.800 on too far, and we don't want to be the 0:16:24.800 --> 0:16:29.119 the demand creator of last resort for the Chinese economy. 0:16:30.000 --> 0:16:33.240 How is that contributing to what we're seeing domestically? I mean, 0:16:33.240 --> 0:16:36.120 we know the data for China has not been particularly good. 0:16:36.520 --> 0:16:40.120 Some talk recently about giving up on the six percent 0:16:40.240 --> 0:16:43.760 GDP growth goal. Talk to us about how you know 0:16:44.160 --> 0:16:46.760 there's all these all these challenges, and how the additional 0:16:46.880 --> 0:16:50.160 challenge of the US no no longer wanting to play 0:16:50.240 --> 0:16:53.240 its UH the role it has been for the last 0:16:53.520 --> 0:16:57.840 few decades. How that is affecting things. Everything that China produces, 0:16:57.880 --> 0:17:01.440 everything that any countries has to be evolved in one 0:17:01.440 --> 0:17:06.520 of three ways. It's either consumed domestically, or it's invested domestically, 0:17:07.240 --> 0:17:10.720 or it's consumed or invested abroad, which is through the 0:17:11.000 --> 0:17:15.359 through the trades, or plus. So the total UH, total 0:17:15.440 --> 0:17:18.640 GDP that's produced in China goes into one of those 0:17:18.680 --> 0:17:22.000 three things. Now, the consumption shares we discuss is very 0:17:22.119 --> 0:17:26.119 very low, so much of it goes into investment and 0:17:26.280 --> 0:17:30.159 the trades built plus investment we want to bring down 0:17:30.200 --> 0:17:34.679 as quickly as possible because China is investing primarily and 0:17:34.760 --> 0:17:38.040 stuff that's not productive. So that's just represents a growth 0:17:38.080 --> 0:17:42.280 in the debt um But here's the problem. If the 0:17:42.400 --> 0:17:46.400 US were to put in constraints that forced the Chinese 0:17:46.440 --> 0:17:51.480 trade surplus to contract, then China either has to accept 0:17:51.520 --> 0:17:55.639 lower growth because now it can't sell everything that it's producing, 0:17:55.720 --> 0:17:59.119 so it has to close down factories and fireworkers, or 0:17:59.160 --> 0:18:00.960 it has to make up for that growth in some 0:18:01.040 --> 0:18:03.840 other way. And the only other way it can make 0:18:03.920 --> 0:18:07.280 up for that growth is by increasing investment even further, 0:18:07.720 --> 0:18:11.800 which means increasing the debt burden even more quickly. That's 0:18:11.800 --> 0:18:15.600 why the trade conflict is so important for China. It's 0:18:15.600 --> 0:18:19.359 sort of it sort of mediates the pace at which 0:18:19.400 --> 0:18:24.880 they can bring down investment, and the smaller the trade surplus, 0:18:25.000 --> 0:18:28.000 then the more slowly they're able to bring down investments. 0:18:28.000 --> 0:18:32.959 And that's the big problem now, the the overall trade problem. 0:18:33.240 --> 0:18:35.240 You know, China is not even the worst defender of 0:18:35.320 --> 0:18:38.120 this case. The Germany and Japan have bigger current accounts 0:18:38.119 --> 0:18:42.240 surfaces than China does, and the problem there is really 0:18:42.240 --> 0:18:45.440 on the capital side. No, this gets a little bit technical, 0:18:45.560 --> 0:18:48.760 but what ends up happening if you have a very 0:18:48.880 --> 0:18:52.760 very high savings rate, uh and and and all countries 0:18:52.920 --> 0:18:56.400 really high stavings rates. Contrary to popular opinion, they don't 0:18:56.440 --> 0:18:59.480 have high savings rates because there are countries that value drift. 0:19:00.119 --> 0:19:04.560 The Germans aren't particularly more thrifty than other Europeans. They 0:19:04.560 --> 0:19:08.399 have high savings grades because the household share of DDP 0:19:08.720 --> 0:19:13.480 is low and the share the controlled by businesses or 0:19:13.520 --> 0:19:16.679 by the government or by the wealthiest quite high. So 0:19:16.840 --> 0:19:20.040 those are high saving entities. You take money away from 0:19:20.280 --> 0:19:23.840 a low saving, high confirming part of the economy and 0:19:23.880 --> 0:19:26.480 give it to a high saving, low consuming part of 0:19:26.480 --> 0:19:30.400 the economy, your savings right to automatically goes up. Now, 0:19:30.440 --> 0:19:34.480 if your savings exceeds your investments, then you have to 0:19:34.640 --> 0:19:38.240 export the excess savings, which is just the flip side 0:19:38.240 --> 0:19:42.080 of running a current account or trade surplus. So countries 0:19:42.119 --> 0:19:46.840 with excess savings have to export those savings somewhere. Trade 0:19:46.880 --> 0:19:49.560 theory tells us that they export them to developing countries 0:19:49.600 --> 0:19:52.879 that need the savings, but of course we know that's nonsense. 0:19:53.119 --> 0:19:56.960 Most of it goes to wealthy countries that don't need 0:19:57.000 --> 0:20:01.200 the savings, for example, the US, and as a result, 0:20:01.240 --> 0:20:07.719 because the US is forced to absorb foreign capital that's 0:20:07.720 --> 0:20:11.160 that's exported to the US. Then it must also run 0:20:11.160 --> 0:20:16.840 the corresponding um current account or trade deficit. Now it's 0:20:16.880 --> 0:20:19.840 a little pedantic, but the point of all of that 0:20:19.960 --> 0:20:23.520 is to suggest that the reason the US runs a 0:20:23.560 --> 0:20:28.160 trade deficit is because it runs a capital account surplus 0:20:28.200 --> 0:20:31.840 over which it has no control. If that's the case, 0:20:32.640 --> 0:20:36.320 then putting tariffs on Chinese goods is worse than useless. 0:20:36.359 --> 0:20:39.920 It has no impact at all. It will reduce the 0:20:40.080 --> 0:20:45.320 US deficit with China, but if Chinese savings continue to 0:20:45.440 --> 0:20:49.240 pour into the US, China will continue to run a 0:20:49.320 --> 0:20:52.560 surplus and the US will continue to run a deficit, 0:20:52.640 --> 0:20:55.800 just not with each other. The only impact the tariffs 0:20:55.840 --> 0:20:59.119 have is to shift trade around. They don't really affect 0:20:59.160 --> 0:21:02.359 the overall sir plus of China or the overall deficit 0:21:02.400 --> 0:21:04.280 of the United States. And you can see that in 0:21:04.320 --> 0:21:07.920 the data. The US deficit with China has gone down, 0:21:08.560 --> 0:21:10.680 the US deficit with the rest of the world has 0:21:10.720 --> 0:21:15.600 gone up by even more, exactly as you would expect. So, 0:21:15.840 --> 0:21:18.159 just to be clear, is the suggestion here that the 0:21:18.880 --> 0:21:21.200 trade war between the U S and China is basically 0:21:21.680 --> 0:21:26.000 sort of an excess money problem, and the US is 0:21:26.040 --> 0:21:31.760 maybe indirectly trying to shrink these capital inflows by targeting 0:21:32.040 --> 0:21:36.520 Chinese goods, because that's one way that it could possibly 0:21:36.760 --> 0:21:40.439 alter those inflows. Yes, it's just the wrong way of 0:21:40.440 --> 0:21:43.639 doing it, but but that's exactly right. So the country 0:21:43.680 --> 0:21:45.800 like China has such a high savings and it's not 0:21:45.880 --> 0:21:51.200 an accident. It's because when you have policies that force 0:21:51.400 --> 0:21:57.280 the household sector to subsidize manufacturing, then of course that 0:21:57.359 --> 0:22:00.679 means that ultimately the part of product she retained by 0:22:00.720 --> 0:22:03.520 the household sector goes lower and lower. So you can 0:22:03.560 --> 0:22:06.680 take the case of Germany in two thousands three, two 0:22:06.720 --> 0:22:11.160 thousand four the Hearts reforms. Basically the Hearts reforms represented 0:22:11.720 --> 0:22:16.600 a transfer of income from German workers two German businesses. 0:22:16.960 --> 0:22:21.680 The households share went down profits sword that's why Germany 0:22:21.800 --> 0:22:26.200 was so competitive in the international markets because basically workers 0:22:26.280 --> 0:22:30.479 subsidize their exports. It's the same thing in China. And 0:22:30.520 --> 0:22:33.359 that's really what the US has to address, not the 0:22:33.680 --> 0:22:36.640 not the not through tariffs. So if you're President Trump, 0:22:37.480 --> 0:22:42.000 or sorry, if you're advising President Trump, you'd say, don't uh, 0:22:42.119 --> 0:22:45.720 you know, forget about all the terroraffs and soybeans or 0:22:45.720 --> 0:22:49.200 and all these things. Pressure j and pink to get 0:22:49.280 --> 0:22:53.520 rid of the JUCO system, transfer the domestic wealth of 0:22:53.560 --> 0:22:58.040 the country to the workers, eliminate this excess savings that 0:22:58.160 --> 0:23:00.840 causes all the excess money to come to the US 0:23:01.280 --> 0:23:03.800 and actually put money in the hands of people who 0:23:03.880 --> 0:23:09.359 might over time by stuff from the US. Absolutely, of course, 0:23:09.400 --> 0:23:12.119 the US can't really go insane right right now, I know, 0:23:12.280 --> 0:23:15.760 just exaggerating, But that's sort of like the contours here, 0:23:16.200 --> 0:23:20.040 which is that And I have to admit just I know, 0:23:20.160 --> 0:23:22.479 like you have a book coming out next year with 0:23:23.320 --> 0:23:26.920 Matt Klein who's at Barrens, and I remember reading this, 0:23:27.080 --> 0:23:28.640 I think a year ago. He had a really good 0:23:28.680 --> 0:23:31.960 column sort of making this point, which is that the 0:23:32.040 --> 0:23:34.280 real way for the US to make progress on the 0:23:34.320 --> 0:23:39.800 trade war would be for essentially the US to pressure 0:23:40.040 --> 0:23:44.440 a that domestic realignment that you've been talking about, so 0:23:44.560 --> 0:23:47.600 that more of the money in China is in the 0:23:47.640 --> 0:23:50.199 hands of consumers as opposed to people with a lot 0:23:50.240 --> 0:23:54.399 of extra cash to put somewhere exact exactly right, you know, 0:23:54.800 --> 0:23:57.960 when when the Chinese sell us something from a hundred dollars, 0:23:58.000 --> 0:24:00.680 that's a hundred dollar flow from from that the US 0:24:00.720 --> 0:24:04.399 to China. Ideally we want that money to flow back 0:24:05.080 --> 0:24:07.640 in the form of imports of goods, it will flow back, 0:24:08.440 --> 0:24:11.400 but it typically flows back in the form of imports 0:24:11.440 --> 0:24:15.320 of capital. So the Chinese will buy US treasury bones 0:24:15.760 --> 0:24:20.359 rather than US manufacturing equipment, and that's surely caused because 0:24:20.400 --> 0:24:24.280 of the way income is distributed in China. Um. Now, 0:24:24.720 --> 0:24:27.439 they're the only way the US can really pressure China 0:24:28.000 --> 0:24:30.800 and Germany and Japan and the rest of them to 0:24:30.960 --> 0:24:35.480 fix their domestic problems is by somehow refusing to allow 0:24:35.560 --> 0:24:39.440 that capital to flow into the US, perhaps by taxing 0:24:39.480 --> 0:24:42.639 and perhaps by quotas. I don't know, but that's really 0:24:42.720 --> 0:24:44.480 the kind of pressure that the U s should be 0:24:44.480 --> 0:24:48.200 able to resort, right, So this is something that keeps 0:24:48.240 --> 0:24:51.280 coming up. And just to play Devil's advocate for a second, 0:24:52.280 --> 0:24:55.719 can you walk us through both the positives and the 0:24:55.800 --> 0:24:59.680 negatives of having a lot of foreign money basically poor 0:25:00.000 --> 0:25:02.919 into the US, Because on the one hand, clearly it 0:25:03.000 --> 0:25:06.800 affects employment through manufacturing, but on the other hand, it 0:25:06.880 --> 0:25:10.199