Dec

6

 Here's something I'm trying hard to understand. Should the US bail out their carmakers, how is that likely to make them profitable going forward or are they going to require ever more taxpayer funding? It seems to me the latter is more likely to be true, especially if they are to be burdened with tough regulation.

It is said that much of problems in the 30s stemmed from the tariff wars, and some blame WW II in part from these tensions. But the political tensions were too ripe to not exploit for political gain that lead down this dangerous path.

While not as obvious global aggression, funding ones own country's industry is a tariff by a PC correct name. In the end, its not about having a "profit" off the loan, its about funding them by giving them a break over market rates. Again a slide of the hand, making the subsidy a loan at a "cost" to them and politically acceptable.

Stefan Jovanovich writes:

The United States in 1873 was in the same position that China is today. It was the fastest growing economy in the world. It was still significantly smaller than the combined economies of Europe, but it was rapidly catching up. U.S. goods — corn, flour, wheat, agricultural and industrial machinery, shoes –were cheaper and were being produced in ever increasing volumes. However, the United States was a capital importer, not exporter. Even as its exports grew, the demand for savings grew even faster. (Then, as now, Americans were inclined to spend before they saved.) The post-Civil War boom in railroad construction and railroad bonds and shares was like the tech bubble and real estate bubble combined. When the bubble burst, with the spectacular failure of Jay Cooke & Company, the consensus was that the Treasury would have to come to the rescue. President Grant took the train to New York and sat down over a weekend with Vanderbilt and Morgan. What came out of the meeting was not TARP one but the first iteration of Bagehot's "lend freely but at a premium". The New York banks formed a clearing house and accepted bank assets as pledges for clearing house certificates that could be used to discharge interbank obligations. Within 3 months the financial panic was over. That did not save the country from a slump, but Grant's subsequent actions did. In 1874 he vetoed the greenback bill even though "everyone" agreed that the United States had to issue more fiat currency to "solve the crisis". In 1875 the U.S. put its national currency back on the gold standard. Within 6 months the dollar was trading at par with specie on international markets; by 1876 the public was no longer worried about the economy but titillating itself with the fright that the Sioux might invade Chicago now that they had disposed of the 7th cavalry.

Where China seems to be fundamentally different from the U.S. in the 19th century is in labor's share of the national income. Immigrants flocked the United States in the late 19th century because wage rates were so much better than they were in Europe. For China wages and domestic private lending have not kept pace with growth. That has left them in the enviable position of having an U.S. dollar and euro reserve, but it has also left them in the dangerous position of being unable - so far - to rely on a revival of economic activity from increased domestic consumption. Instead, they seem to be going down the path that Russ describes: hinting at a depreciation of their own currency, paying export subsidies, restricting imports. That is a very different policy from the one the U.S. followed in the 1870s. The United States did have a tariff, but there were no restrictions on quantities and no protectionist inspections. Throughout the rest of the 19th century British and German steel exports to America rose even as the U.S. become the world's steel producer and the resumption of the gold standard increased the exchange value of the dollar.

One wishes the Chinese would follow the American example of a century and a half ago and the Americans would not adopt the European state capitalist solutions that came out of the collapse of their property and financial markets during that same period.

Somehow, I don't think either economic pony is going to end up under the Christmas tree this year or next.


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