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On effective stimulus有效的刺激方案 / 謝國忠

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发表于 2008-12-11 12:44 PM | 显示全部楼层 |阅读模式


http://xieguozhong.blog.sohu.com/106144482.html

 

2008-12-09 | On effective stimulus

 

On effective stimulus有效的刺激方案 / 謝國忠


The following was written Dec 1 and is in the current issue of Caijing Magazine. The current actions by central banks and governments are first for financial stabilization and second for boosting growth. The policy actions continue to ignore that the main problem is excessive indebtedness and only debt reduction could bring back normality. The debt reduction can be achieved either through bankruptcy or inflation. Cutting interest rate or boosting liquidity support for financial institutions couldn't solve the problem.


Fiscal stimulus alleviates the problem by allowing debtors to earn income to pay off debts gradually, i.e., turning private debt into public debt gradually like in Japan. Fiscal stimulus would work less effectively elsewhere than in Japan. American and Chinese companies don't want to keep excess labor like in Japan. Hence, fiscal stimulus can't stop unemployment rising quickly. The political pressure would grow sharply in China and the US to solve the problems as quickly as possible.



The most effective policy to end the current problem is for the Fed and China's PBoC to print money to distribute among their peoples evenly. The money can be used to pay down debts in the US and buy properties in China. The appropriate amount is probably similar to per capita income. As long as Rmb and dollar are tied during the monetization process, stability can be maintained. Andy



Caijing Magazine

8 Dec 2008

Andy Xie


On effective stimulus点击查看译文



China's announcement of ¥4 trillion fiscal stimulus was received positively by the market. Together with the announced intention of the incoming Obama Administration for a big fiscal stimulus, possibly over $500 billion, market bounced on the economic recovery hope. From the recent lows on Nov 20 S&P 500 bounced 19% and Hang Seng Index 15% within seven trading sessions. The optimism on the prospects for China and the US's fiscal stimulus played a major role in the market recovery. Interest rate cuts and the bailout of the Citigroup were of secondary importance. In a credit crisis fiscal stimulus is far more effective than cutting interest rate.



Cutting interest rate works through encouraging borrowing. Liquidity is a euphemism for short-term debt. Greenspan's magic-rapid economic response to his rate decisions was a bubble phenomenon. His rate decisions changed debt demand for asset speculation. Through its impact on asset prices he moved the economy. Economic theory says that monetary policy works through changing demand for debt in the real economy. Asset prices move with monetary policy in anticipation of the change to future economic activities. The magnitude of such asset price movement wouldn't be big enough to affect economic activities. When the magnitude of asset price change in response to monetary policy is big enough to determine economic activities, it is a bubble. I have written this point in different versions numerous times in the past ten years to emphasize that Greenspan's magic was a bubble. For the diehard Greenspan worshippers out there, wake up and smell the coffee!



When a credit bubble bursts, cutting interest rate is a stabilizing force. It decreases the interest payment for debtors and the incidence of bankruptcies. However, it couldn't recharge economic activities through increasing debt demand. A far better approach is to print money and distribute it evenly among people. When a credit bubble bursts, debtors need a write-off. It can be done through bankruptcy or inflation. Distributing printed money evenly among people causes the least distortion to achieve a general debt reduction through inflation.



The US households have too much debt versus their income. They need a write-off and spend less in the future. If the Fed prints $30 thousand per capita and distributes it to everyone American citizen, it would total $ 9 trillion versus $14 trillion of household debt. Some households don't have debts and can hang onto the money. Others will pay down their mortgages or credit card debts. Of course, there will be inflation and dollar depreciation. As long as the printing is done in a transparent fashion, there wouldn't be overshooting. The US real economy has about $34 trillion in debt. If the Fed prints $9 trillion, the general price level should rise by 26% and the dollar down by 21%. Both would be reasonable prices to pay for solving the problems.



The current monetary policy is (1) cutting interest rate to help debtors stay alive and (2) bailing out failing financial institutions or real economy businesses with capital injections and debt guarantees. The Fed has committed $8 trillion for the later. These approaches don't solve problems and reward bad companies. It decreases economic efficiency, and causes unpredictable inflation in future. Keeping interest rate so low may revive commodity speculation, causing great harm to a weak economy. The Fed should rethink its policy.



Cutting interest rate in China has less positive and more negative impact than in the US. It is totally false to claim that lowering interest rate would boost consumption. Lowering interest rate may decrease incentives for saving, as returns on bank deposits decline, and boost debt demand for financing consumption. The former is offset by the negative income effect from lowering interest rate. The later is minimal in China. Chinese consumer credit is virtually non-existent. It is wishful thinking to hope for this effect in cutting interest rate.



China's interest rates are about dividing benefits among borrowers, banks, and savers, not about boosting or cooling the economy. For the past ten years the interest rate policy has been against savers in favor of banks first and borrowers second. The deposit rates have been kept at one third of the growth rate of nominal GDP. It is the root cause for so many bubbles in China. When interest rate is so low against economic growth rate, savers become credulous about all sorts of quick money schemes. From stocks and properties to puer tea and modern paintings bubbles have happened big and small, doing great damages to the Chinese economy and society.



Naïve first-time investors in the stock market have lost their savings. Many people who speculated in the market and saw their portfolios fluctuating in a day more than their salaries have lost desire to hang onto their jobs. The market burst may not bring them back to their previous occupations. Numerous cities have become hooked onto the money from property development. The money was so easy for them: they were building properties like manufacturing TV sets but assumed the properties would sell at antique prices; banks lent trillions to developers for property construction before the properties could be sold; the bank loans had become local government revenues. Many modern paintings have been ramped up hundreds of times in prices. The market mistook weirdness for art, and painters rushed out weirder and weirder stuff to satisfy the market. In a bubble, who cares, as long as someone else would pay a higher price down the road. I dare to predict that some of the hottest paintings in the past three years will drop over 90% in value.



The low interest rate caused the problems that are haunting us. Now, governments say the solution is lower interest rate. Somehow, it doesn't sound right. Conventional wisdom says that a central bank should cut interest rate when economy turns down. That is true in a conventional downturn driven by inventory cycle. After a credit bubble bursts, cutting interest rate has much less punch. A better approach is to print money and distribute among people to cause inflation that decreases general debt burden, while keeping interest rate relatively high.



China is facing three headwinds in its economy. First and foremost, declining global demand is cutting China's exports. Second, stock market bursting is dampening luxury consumption demand, especially for big ticket items like automobile. Third, the property sector is experiencing a huge inventory overhang, which decreases new property development.



There aren't many measures to deal with the first two negative factors. Chinese government has already increased VAT rebates for the exporters. The policy purpose in the current environment should be to enhance their survivability and avoid unnecessary bankruptcies. Their revenues would only recover with the global economy. The negative effect on luxury consumption from the stock market decline cannot be reversed. The market was a bubble. The strong luxury demand was unsustainable anyway. Besides, the luxury prices in China are much higher than in other and richer countries. It was a bubble phenomenon. I saw something similar in Southeast Asia ten years ago. The market needs to normalize. The demand weakness is forcing the issue.



There are effective policies to deal with the property inventory. The US property market has absolute oversupply. Many households were buying second homes purely for speculation. When the bubble bursts, there are just too many houses against the number of households. Most Chinese urban households still live in old and low quality flats. They would prefer the new flats. But, the price level, around 20 times household income in many cities, makes the purchase impossible. If the prices come down, the flats can be sold. I have suggested tax reductions (e.g., decreasing transaction taxes and making purchase deductible from income tax) to clear the inventory.



Cutting interest rate won't clear the inventory. The affordability is too low for interest rate to make a big difference. If monetary policy is to be used for clearing the property inventory, it would be better to print money and distribute it evenly among people. For example, the central bank could print Rmb 20 thousand per capita. It will give poor households the money for down payment, bringing a new buyer group. Of course, it would lead to inflation, which decreases property price in real terms and is what's needed to clear the inventory. As long as the monetary expansion is transparent, it won't lead to hyperinflation and would be good for social harmony.



Maybe China and the US should coordinate in monetization. The pair can print similar amounts of money relative to their GDP and keep their currencies linked up. It would decrease exchange rate volatility during monetization. After a credit bubble bursts economic revival depends on a debt writeoff. Cutting interest rate doesn't achieve that. A better approach is to print the necessary amount of money and distribute it evenly among people.



Fiscal stimulus is certainly effective in the current environment. The credit market is not functioning effectively as declining asset prices have made the capital base of borrowers too thin. As discussed above, debt reduction through inflation could revive the credit market. An alternative is for fiscal stimulus to boost their income. Overtime, their capital base improves. This is a slow approach and may require massive buildup of public debt. Japan adopted this approach in the early 1990s. Its national debt has surpassed 160% of GDP and, yet, its economy is still sluggish.



China's announced fiscal package of Rmb 4 trillion is not all new money. Only the increase against the old spending plan is the stimulus part. It is too early to tell the exact amount yet. An indirect observation is to observe the change in the fiscal position of the central government, especially the issuance of government bonds. As bank financing plays a big part in infrastructure projects, the increased spending by the central government would have a bigger effect. If the central government issues Rmb 500 billion of treasury bonds and it leads to Rmb 500 bn of bank financing for related projects, the total amount of stimulus is about Rmb 1 trillion. I suspect that the total stimulus would be close to that next year.



China must watch two risks associated with fiscal stimulus. First, low efficiency projects could be funded with little long-term benefit. There are indications that wasteful spending could be coming. Reportedly, local government representatives were lining up at the National Development and Reform Commission ('the NDRC') for handouts. Projects that were short down by the NDRC were brought back. China's tendency is to spread the projects around to make all happy. This is not optimal. Most places in China should not urbanize or industrialize. Their ecosystem is too fragile and their local population would migrate eventually.



China is a poor country. The money for fiscal stimulus should be used carefully to promote the country's long term development. Urbanization is probably the most important part of the development process. As I have written for the past decade, China must concentrate its resources to build super cities. China's population is 4.3 times the US's with half as much habitable land. Ceteris paribus, China's cities should be 8.6 times as big as the US's. It may sound frightening but makes a lot of sense. Most would understand that urbanization has huge economies of scale in infrastructure development. Less understood are the economies of scale in job creation. By allowing greater division of labor large cities offer more job opportunities than small cities.



Local government issuing bonds has become a hot topic. It would be a disaster to allow it at present. It would lead to wasteful spending and local government bankruptcy. Ultimately, the central government would be liable for local government debt. It is much better for the central government to issue bonds and distribute the money to local governments. It could be part of fiscal reform. For example, the share of fiscal revenue for local governments could be boosted by five percentage points and be applicable retroactively for 3-5 years. The central government could issue bonds to fund the cost. It alleviates the fiscal crisis at local government level, put their fiscal position at a more solid ground in the future, and contains the risk of local government bankruptcies.



The right for local governments to issue bonds must be tied up with China's urbanization strategy. Only successful cities would be able to repay their debts. Local government bond market should develop in conjunction with China's urbanization strategy. Before the strategy is clear, the local government bond market shouldn't develop.



It may serve a better purpose for China to spend its fiscal stimulus money on unemployment benefits. The economic downturn may cause 20 million migrant workers to lose jobs. Infrastructure projects could absorb some. But it would take time for all to be employed. Chinese government should consider allocating some stimulus money to help them through the tour period. Rmb 500 per person or Rmb 10 billion per month in total could alleviate their difficulties, I believe. This amount is relatively small compared to the size of the stimulus package and would be an effective support for social stability during the economic downturn.



Some local governments are issuing policies to restrict layoffs at businesses. This would be wrong. Chinese companies need to upgrade to generate another growth cycle. Without being able to restructure their labor force they can hardly upgrade. If companies are forced to keep excess labor, the business sector will decline in efficiency and the whole country would suffer. Companies should be allowed to restructure to achieve maximum efficiency. Governments should use fiscal levers to help the affected workers.



China's macro policy has shifted t a simulating stance. The stimulus should be deployed in the most efficient and equitable manner. It is still early days in the stimulus policy. Care must be taken to fill in the details.
发表于 2008-12-11 12:57 PM | 显示全部楼层
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