China’s December trade figures came out and, following November’s lead, everything is moving in the wrong direction. Exports were down 2.8% (versus up 21.7% in December 2007) which although bad at least is better than the average forecast of over 4%. Within overall trade exports to Europe were down 3.5% and to the US 4.1%. Given how quickly things are deteriorating in both countries, with rising unemployment likely to cut further into consumption, I suspect that this isn’t the last of the poor export numbers. As recently as three months ago most economists were forecasting export growth in 2009 of over 15%, but now most seem to be forecasting a contraction of over 10%.
Imports were way down, by 21.3%. I am still having trouble reconciling some of the other numbers for consumption, but generally speaking people who know more about this than I do say that of all the macro data produced in China, trade numbers are usually the most reliable. This suggests that Chinese consumption is dropping quickly, and it is probably no good blaming this on declining exports (about half of China’s exports are processed imports) or declining commodity prices since the decline in imports is much too large for either explanation to cover.
For the first time in six months China’s monthly trade surplus did not hit a new world record, but at $39.0 billion it is just a whisker below November’s $40.1 billion, and it is easily the second highest monthly trade surplus ever, beating out number three (China’s October trade surplus) by well over 10%. For those who are counting, the trade surplus in 2008 was $297.5 billion. The second half of 2008, at $197.6 billion, accounts for two-thirds of the total and the last quarter, at $114.3 billion, accounts for nearly two-fifths of the total. This is not a picture that the rest of the world, struggling with overcapacity and too little demand, is going to be happy to see.
Yesterday Peter Morici, former chief economist at the U.S. International Trade Commission and currently a professor at the University of Maryland, called on President-elect Barack Obama to press China to allow the yuan to appreciate because weakness in the currency is hurting U.S. jobs and manufacturing. According to an article in yesterday’s Bloomberg:
Ending Chinese currency market manipulation and other mercantilist practices are “critical” to reducing the U.S. trade deficit and creating jobs in the U.S., Morici said. “Obama must address the huge cost of imported oil and the trade deficit with China,” he said. “Otherwise, any effort to resurrect the economy is doomed to create massive foreign borrowing, another round of excessive consumer borrowing, and a second banking crisis that the Treasury and Federal Reserve will not be able to reverse.”
Morici is making the point that if demand leaks out the US trade account at anywhere near current levels, US government borrowing required to create the demand needed to boost employment in the US will be much greater than otherwise. Instead of requiring the US to initiate debt-funded policies to boost employment in the US, China, and everywhere else, it is politically much easier for Americans to demand that the US government borrow to fund employment in the US, and let China and other countries generate employment by their own fiscal borrowing. It is hard to dispute this logic. Others will make the same argument in the US, the UK, France, Italy, Spain, Australia and many other countries with large deficits.
I want to digress a little here. My fears about the hard-to-combat logic of trade friction in a world of collapsing demand and large trade imbalances seem to have thrown me into a group of analysts with whom on the issue of trade I do not always agree. For the record, I do not have a problem with secular trade deficits and I do not believe in “balanced trade”, whatever that means. This means I have never been a trade-deficit hawk.
In the days when everyone complained about the sustainability of the US trade deficit, they always argued that it was unsustainable either 1)because the continued foreign financing of the US trade deficit was unsustainable, or 2)because trade deficits represented the “giving away” of the US to foreigners. I did not agree with either of those arguments. I am not worried at all about the “giving away” argument for a bunch of reason that are probably obvious to most of my readers.
As for the other claim, given the huge size, efficiency and flexibility of the country’s financial system (and no, the current crisis does not change my view at all), I never doubted the ability of the US to receive net capital inflows for very long periods of time. Furthermore I believe that given the terrible demographics that Europe, China and Japan face (not to mention Russia) and the relatively benign US demographics, it makes sense for all of these countries to run up claims now against the US – which they can only do by running trade surpluses with the US – since they will need to liquidate those claims over many decades (and so run trade deficits against the US) to pay for their demographic adjustment. Surprisingly whenever I say this there is always some one who howls (for some reason this is a subject on which polite disagreement is difficult) that the US faces its own demographic crisis and if I don’t believe this why don’t I offer to guarantee the payments needed to resolve the upcoming pension crisis.
Aside from the fact that my guarantee would not be credible, the point is largely irrelevant. The fact that the actuarial assumptions underlying the US pension system turned out to be wrong does not indicate a demographic crisis like that facing Europe, Japan and China, who also have their own pension crises in addition to their aging problems. Unlike the US, these countries are facing a sharp drop in the size of the working population relative to the total population which, as I see it, creates a demographic bias to trade deficit (I think of total population as a proxy for consumption and working population as a proxy for production). This is not nearly as serious a problem in the US, and in the US would likely anyway simply lead to a relaxation of immigration restrictions. The US has a very different sort of demographic problem – one that represents intergenerational transfers, and these have almost no bearing on the global balance of payments.
What was unsustainable about the current global balance, in my opinion, was not the fact of a US trade deficit (although by 2006 and 2007 it had gotten too high to last very long), but rather the level of household borrowing needed to sustain it. These are not unrelated things, of course, but I would argue that if the US trade deficit had been funded by equity inflows that resulted in an increase in domestic investment, there would not be a trade-sustainability problem. If it was funded by a household borrowing binge, then trade-deficit sustainability is necessarily constrained by the household balance sheets. This is why I have argued that a program of massive fiscal spending to replace household demand is not going to solve the current problem. It simply replaces one kind of unsustainable behavior with another, and still has to be resolved at some point with massive deleveraging.
To get back to China and current issues, the problem with the US trade deficit now is sort of a “Keynesian” problem. US demand has the impact of generating both US production (and employment) as well as foreign production (and employment), and in a world of contracting demand, it is natural that countries that export demand – i.e. trade deficit countries – are going to be a lot less eager to do so. Anything that brings imports closer into balance with exports is likely to have a demand-enhancing impact similar to fiscal expansion, with the benefit that this isn’t achieved by running up fiscal debt. On the other hand it will have a demand-reducing impact for trade surplus countries. That is why trade disputes are likely to be very attractive to trade deficit countries who have – I will continue to insist but it seems recently that this has become a much less “surprising” claim – the upper hand in any dispute with the “virtuous” countries with high savings rates and trade surpluses.
There is a lot of other recent news that I wanted to discuss, especially about reserve accumulation and the banking system – the recent closing of a bunch of informal banks, for example – but this post is long enough and I will postpone the discussion for later this week.
Prof Michael,
I’m a regular follower of your blog for two years.Your topics change a few times(backward banking,rigid currency regime,inflation shooting up,and now,trade surplus),but the theme is always the same:China will be doomed.But we can’t see any of your predications coming true yet.I don’t know what do you feel about this”my predication never comes true”embarrassment?
Hi Michael,
I discover that I shall certainly always disagree on policies. Count me with the archaic Austrian economists of my time (the seventies). I disagree on the value of significant deficits of any kind.
Count me siding with with Jacques Rueff and Von Mises on monetary stuff… This view has allowed me to save my lifetime savings up to now. But the honest and kind way you put stuff around will always get you a friendly read. Even from those who strongly disagree with your views.
You are certainly not a Wall Street banker, City – or their pale continental copies – and I do appreciate it.
Kind regards
To hear Morici in his own words here is a clip….
http://watch.bnn.ca/squeezeplay/january-2009/squeezeplay-january-9-2009/#clip128274
For some worthwhile, non economist view points…. One can extrapolate from Thomas Huxley why you cannot permanently distort capital value.
http://aleph0.clarku.edu/huxley/CE9/CaML.html
And General Motors Bob Lutz chimes in …..
Economists like to tell me I’m not a trained economist and I don’t know what I’m talking about. But my personal economic theory is that we’re in this mess because for the last 15 years, the United States has been producing essentially nothing and importing everything from China and Japan and wherever. And we were paying each other high salaries and saying, ‘Isn’t this a wonderful world? We all make a ton of money, we produce nothing, and look at this great DVD player I just bought for $19.95′
“What’s wrong with this picture? It’s not a normal state of affairs for a country to spend, spend, spend and not produce, produce, produce. The argument was always: ‘Oh yes, but the financial sector. We have the world’s best, most sophisticated and most powerful financial sector, so stop worrying. This country is so well run now by the financial establishment that we really don’t have to produce things anymore.’ And we saw what just happened. So in that I feel vindicated, because I’ve been saying that for years.”
Prof Pettis,
Regarding to trade surplus and export in China. I would like to quote Arthur Kroeber from Dragonomics research, according to him
“Contrary to a widespread view that China’s exports held up well until the middle of this year and then suddenly collapsed, export growth peaked at the end of 2006 and then declined steadily through 2007.” The reason for the widespread misleading concept is caused by the reporting currency. Such trend shows up when you use RMB, not USD.
I wondered if someone could help me to understand the components of GDP growth in China in the past quarter and looking forward to 2009. I have been reading since November of very significant contractions in electrical energy consumption, of job losses, and of declines in exports. However, the most dire predictions are consistently of 5% real GDP growth.
If exports are 40% of the economy, and they have very significantly declined, then growth in the domestic economy will have to be very significant to keep the overall economy from contracting. What is the consensus view on the components of GDP that lead to 5% overall growth?
Dear Dr. Pettis:
I disagree with your demographic justification for continued trade imbalances. It is hard to imagine a future where trade deficits reverse because US becomes a large exporter of geriatric products. More likely Japan and other trade surplus countries will become rentiers, living comfortably off the proceeds of their accumulated wealth.
Moreover, in a world where demand not supply is the bottleneck, I’m not conpletely convinced that demographic contraction is the onerous curse you suggest. It may be bad for GDP, but beneficial from a broader perspective of standard of living and sustainability.
Setting aside the question of financing, I have no doubt that a smaller cadre of Japanese workers will have no difficulty providing the goods and services demanded by a growing cadre of senior citizens. Returning to the question of financing, it is true that there needs to be accumulated savings, but this can occur domestically, without accumulating a huge stockpile of foreign assets.
I certainly don’t blame the Japanese or Chinese for accumulating assets to make their futures a bit more comfortable. But it seems crazy to suggest that the US for some reason shouldn’t do the same.
What do you suppose the world would look like if the Chinese accumulate the same per capita level of reserves as the Taiwanese?
I hope the “balance trade” argument wins, with trade surpluses alotted to the poorest developing countries. People who believe that large trade imbalances are harmless or self-adjusting do not have the weight of history on their side.
Regards,
Brian
Mr. Pettis,
I agree with your reasoning that it is the amount of leverage that contributes to instability. In fact, I think that’s exactly what Alan Greenspan stated in his book, The Age of Turbulence. My question is what should be done to promote Chinese domestic investment and consumption? To encourage consumption, perhaps the Chinese gov’t should implement a better safety net in health care so that consumers would decrease their level of precautionary savings? To encourage investment, perhaps the solution is to completely reform the political and legal structure so that firms won’t have to worry about legal ambiguities and bureaucratic abuses? Appreciate your comment.
Just compare the rate of change in export and imports for China vis a vis USA. That should be enough to convince Obama. The rate at which Chinese imports dropped is simply staggering. This is the most important number that foreshadows the things to come. I hope that the Chinese change this behavior in time.
Just to let you know that I read your blog every week. I cannot truthfully say that I enjoy them *grin* well, reality is not always pleasent *lol* But I do find your blogs very informative and in my opinion the most authentic information/analysis coming out of China.
Pettis: This suggests that Chinese consumption is dropping quickly, and it is probably no good blaming this on declining exports (about half of China’s exports are processed imports) or declining commodity prices since the decline in imports is much too large for either explanation to cover.
Given that oil prices are one third what they were a year ago, commodity prices makes sense as an explanation. It’s 20% drop y/y, which matches November’s figure, and matches the drop in commodities price.
This is actually a bad thing…..
The drop in commodities prices is likely to large problems. When commodity prices (i.e. food) drops with fixed state-set oil prices then farm incomes drop. This is going to cause a double whammy for the rural countryside.
Pettis: Morici is making the point that if demand leaks out the US trade account at anywhere near current levels, US government borrowing required to create the demand needed to boost employment in the US will be much greater than otherwise.
Except that much of the US borrowing comes from China. If you stop demand leakage, but this results in less Chinese borrowing you end up roughly were you were before.
Pettis: It is politically much easier for Americans to demand that the US government borrow to fund employment in the US, and let China and other countries generate employment by their own fiscal borrowing.
There is a very simple response to this logic.
Who is the US going to borrow from whom? Once people ask that question, I don’t think trade protectionism is going to be politically palatable at all.
Excellent work! Thanks for sharing your thoughts.
Michael,
Excellent and thoughtful commentary! I am one of the balanced trade advocates who has been touting your commentaries lately. (You were even quoted again in my blog entry today!)
You almost understand the balanced trade argument, but are missing one of the key elements. Your paragraph beginning with “What was unsustainable” could have come right out of our 2008 book, “Trading Away Our Future.”
Here is the argument that you don’t yet understand: When foreign central banks send their countries’ savings to the United States, they drive up the dollar to an artificially high level, and thus take away investment opportunities in US production. In other words, it was no accident that the Chinese savings sent to the United States by the People’s Bank of China during this decade have financed US consumption, not US fixed investment.
Howard Richman
http://www.tradeandtaxes.blogspot.com
p.s. We already have a link from our blog to yours. Perhaps you would be willing to reciprocate.
A simple question, are trade deficits generally funded with equity sales or debt, and what determines that?
A cursory look at China’s population pyramid appears to show a problem looming, but not imminent. The 2025 projection depicts a low dependency ratio and a bulge in the most productive age cohorts. By 2050, the aging problem gets nasty.
In the meantime, what worries me more is the “surplus” tens of millions of males over females in the younger cohorts. Is this going to lead to more imminent problems than the aging and dependency ratio issue?
I am a little surprised that China is regarded as having the same demographic problem with Japan, Russia and Western European countries. In Japan and Europe, the problem is real due to their nature low birth rates. But in China, the so called “demographic problem” can be literally solved overnight by relaxing the one child policy. This is because the natural birth rate in China, especially in the rural areas, is probably at least on par with those of the new immigrants in the U.S., if not higher. In fact, some Chinese demographic experts are advocating changing the one child policy to a two child one NOW, in order to have a healthier demographic profile when the population stabilizes at approximately 1.6 billion before the mid century.
The U.S. financial deficit is sustainable as long as USD is the world’s reserve money, and the U.S. can print USD to buy its own treasury bill to prop up its price. The solvency and competence of its financial institutions might be less relevant.
The notion that the U.S. can solve its future demographic problems via immigration has been debunked many times. A few useful sources
From “Immigration in an Aging Society” (http://www.cis.org/articles/2005/back505.html)
“Legal immigrants are poorer than natives on average, resulting in lower tax payments. There is a large body of research showing that legal immigrants take many years after arrival to close the earnings gap with natives, by which time they are on average older than natives.32 This means they have lower lifetime earnings and Social Security payments because Social Security taxes are levied as a percentage of earned income. Studies that have actually looked at legal immigrant Social Security taxes support this conclusion. A 1998 study by the Urban Institute, which is generally regarded as a supporter of high immigration, found that legal immigrants in New York State paid only 85 percent as much in Social Security taxes as natives on average”
“And SSA is assuming that those earnings are the same as natives from the moment of arrival, which is almost certainty incorrect. In addition, because Social Security is redistributive, the lower average income of legal immigrants means that they will tend to have a more negative long-term impact on the system that is not considered if immigrants are treated as average taxpayers from the moment they arrive.”
The St. Louis Fed published a paper that bears on this subject. The title is “Is the United States Bankrupt?” (http://research.stlouisfed.org/publications/review/06/07/Kotlikoff.pdf). The author (Laurence J. Kotlikoff of Boston University) looks at the relationship between immigration and the future finances of the U.S. I quote
“CAN IMMIGRATION,PRODUCTIVITY GROWTH, OR CAPITAL DEEPENING SAVE THE DAY?
Many members of the public as well as officials of the government presume that expanding immigration can cure what they take to be fundamentally a demographic problem. They are wrong on two counts. First, at heart, ours is not a demographic problem. Were there no fiscal policy in place promising, on average, $21,000 (and growing!) in Social Security, Medicare, and Medicaid benefits to each American age 65 and older, our having a much larger share of oldsters in the United States would be of little economic concern. Second, it is mistake to think that immigration can significantly alleviate the nation’s fiscal problem. The reality is that immigrants aren’t cheap. They require public goods and services. And they become eligible for transfer payments. While most immigrants pay taxes, these taxes barely cover the extra costs they engender. This, at least, is the conclusion reached by Auerbach and Oreopoulos (2000) in a careful generational accounting analysis of this issue.”
Note that the Heritage foundation found that each low-skill immigrant family costs taxpayers (net) around $20,000 per year. See “Executive Summary: The Fiscal Cost of Low-Skill Immigrants to the U.S. Taxpayer” (http://www.heritage.org/Research/Immigration/sr14es.cfm) . Obviously, expanding low-skill immigration would impoverish America.
Finally I suggest checking the sensitivity analysis in the Social Security Trustees Report. It shows a rapid decline in the workers / retirees ratio across a wide range of immigration assumptions. Check out table VI.D3 in the LONG-RANGE SENSITIVITY ANALYSIS (http://www.ssa.gov/OACT/TR/TR08/VI_LRsensitivity.html#100036). In the low immigration scenario (790,000 per year) the trust fund is exhausted in 2040 and the annual balance for 2082 is -4.61%. In the high immigration scenario (1,375,000 per year) the trust fund is exhausted in 2042 and the annual balance for 2082 is -3.82%. Of course, this assumes that immigrants have equal skills compared to natives which is clearly not true.
Thanks Daniel de Paris, but I have to confess that before coming to China in 2002 I actually spent fifteen years as a Wall Street trade and banker. Perhaps that’s why I am a little skeptical of their claims.
Glen M. perhaps because he is at General Motors that Bob Lutz can say “the United States has been producing essentially nothing and importing everything from China and Japan and wherever.” Actually the value of US manufacturing is three to four times the value of Chinese manufacturing.
Leon, Arthur’s point is that the growth in exports started slowing earlier than many think if we measure it in RMB, not dollars. That may be true, although I am not sure why it is better to measure it in RMB rather than dollars. If we are interested in the growth impact of exports on China’s economy, the RMB may be the better currency for measurement, whereas if we wanted to measure the amount of overcapacity that the rest of the world is absorbing, it is better to measure it in dollars. At any rate, export growth may have begun slowing earlier than many think, but it did not go negative until recently. By the way, as one of the largest exporters in the world and with rapidly growing share of the world economy, the astonishing growth rate of China’s exports would have to decline for purely statistical reason.
Joseph, this is a complex question that I can’t address here, but a lot of people have written on the subject, and in particular I suggest you try to get hold of Stephen Green’s research at Standard Chartered.
Brian, I am not sure how quickly you read my post but neither I nor anyone who is thinking about the trade impact of demographic changes was arguing that the export of geriatric products was going to be the swing factor. I also did not in anyway suggest that demographic contraction is an onerous curse. My point was quite different – that the relationship between total population and working population has trade implications.
Observer, there is a very wide ranging debate on things the government can do to promote consumption, including not just the things you mention but also such things as allowing workers to organize for better wages, removing measures that force down interest rates and the value of the currency, and several other things.
Tyareasun, and I would add that US import numbers are also collapsing at an alarming rate. According to today’s AFP: “The US trade deficit fell a hefty 28.7 percent in November to the lowest level in five years but the improvement comes amid a sharp contraction in global commerce, government data showed Tuesday.”
Twofish, for your first point I haven’t really been considering that, but you may be right. For your second, I suggest you turn it around. Less borrowing from China means less demand leakage (because it also means a smaller US trade deficit) and the reduction in the deficit has the same demand-enhancing impact that fiscal spending does. In other words the US achieves the same employment effect without expanding the fiscal deficit. Some people find it easier to think in terms of the investment multiplier. Since the size of the multiplier is inversely related with the savings rate, and the savings rate is a function of both the US and foreign savings rate, with a larger deficit implying a greater share in the equation for the foreign savings rate, a more “open” economy has a lower multiplier. Closing the economy, in other words means that the impact of each fiscal dollar is greater, and so the USG needs to borrow and spend less to get the same employment impact. As for your third point, “Who is the US going to borrow from?”, I have addressed this a lot, as have Brad Setser and many others. The US will not have a problem borrowing. In fact the US is seeing a rapid net rise in savings even after USG spending. The problem is not insufficient savings. It is insufficient demand, and any demand enhancement that comes out of China will, via a smaller trade surplus, have the same demand enhancement impact of USG spending. These tow things are not a tradeoff.
Howard, I don’t disagree with your analysis but I am not impressed by the argument that running trade deficits leads to underinvestment. The US ran trade deficits for most of the 19th century, during which time its productivity growth was the envy of the world, and has been running deficits for much of the past 30 years, but I don’t see evidence of significant underinvestment relative to Europe or Japan in terms of productivity growth.
OGT, trade deficits are funded by capital exports from the surplus countries that can take many forms, if it is done by private investors, and by purchases of government debt, if it is done by central banks.
Seatrus, I don’t think it is as easy as all that. There are compelling reasons to relax the one-child policy, and a few experts are advocating it, but the problem is that the relief comes only after 20-25 years. Until then the dependency ratio actually gets much, much worse.
Peter Schaeffer, I think you might be confusing two different demographic problems. One is about the size of the working population relative to the non-working. The other is about the funding of pension liabilities. I have no expertise to argue about the latter issue (although, for the record, I tend to be on the extreme side of the pro-immigration debate). My main point is that the US dependency ratio is fairly stable over the next several decades whereas Europe, Japan and, especially, China have rapidly deteriorating dependency ratios.
Schaffer: Legal immigrants are poorer than natives on average, resulting in lower tax payments.
This isn’t the relevant metric. A 25-year old legal immigrant may be poorer than a 25-year old native person, but they put more into the Social Security and taxation systems than a retired 70-year old native.
Michael: Actually spent fifteen years as a Wall Street trade and banker. Perhaps that’s why I am a little skeptical of their claims.
I actively work on Wall Street, and you get to see the best and the worst of people and social systems. There is so much money and power flowing in Wall Street that it magnifies the character traits and personalities of the people in the system. Good things become very good. Bad things become very bad. New York City is full of both demons and angels all in a struggle for your soul, and it’s hard to tell who or what is a demon and who or what is an angel, because they look so much alike.
Michael: Closing the economy, in other words means that the impact of each fiscal dollar is greater, and so the USG needs to borrow and spend less to get the same employment impact.
But the closing the economy will hit productivity and job creation which means that less tax revenue and a greater necessity for job creation. One thing about trade is that comparative advantage works. Over the last decade multinational corporations have been able to restructure themselves to take advantage of pricing differences and generate huge amounts of wealth. Badly distributed wealth, but wealth nevertheless. Restructuring the economy to rollback all of those changes would be extremely disruptive, and more importantly disruptive in obvious ways.
I don’t think there will be much protectionist sentiment this year since everyone is afraid of losing their job. If you look at the 1980′s and 1990′s, the time when you will have lots of protectionist sentiment will be after the recovery starts getting underway. In that situation, you have a booming economy and but no new jobs yet, and in this environment it’s easy to make the case that the jobs are going overseas.
Michael: As for your third point, “Who is the US going to borrow from?”, I have addressed this a lot, as have Brad Setser and many others. The US will not have a problem borrowing.
If the US doesn’t something hugely radical with trade I think it may have huge problems borrowing from overseas.
Michael: In fact the US is seeing a rapid net rise in savings even after USG spending.
But without foreign money, this puts interest rates higher than they otherwise would be which hurts the recovery.
I don’t think that we are going to see too many radical proposals in how the global system works in 2009. There are just too many immediate problems to think too much about fundamentally changing the system. The interesting year will be 2010, which is an election year in the United States. It is also the start of the transition to power in China 2012. The top leadership of for 2012-2022 has already been decided, but there is the issue of everyone else.
By 2010/2011, either things will get better or they won’t. If they get better then people will have energy to start talking about fundamental economic changes and systematizing a lot of the changes that have already happened. If things don’t start getting better, then all of the fixes people have had will get discredited and people will be advocating fundamentally new economic theories.
The question is if there is a relationship between an aging population and asset return/return to investment. This could depend on national characteristics with countries focused on labour intensive industries in harm’s way.
Kevin C. Cheng did a good overview IMF paper on the economic implications of China´s demographics in 21st century.
I would instinctively go with Twofish argument on the metric of a 25 year old immigrant putting more into the society then a 65 year retiree and thus there is a positive relationship between a young population and return to investment and a negative one with an older population.
Moneyllusionist, actually I think the reason why so many people follow professor’s blog is because he has been right so much oftener than anyone and because even when he is wrong he explains it so well. As I remember, the only big predcition he got wrong was that China would revalue the currency, and he said they would have to do it because the alternative would be terrible. Well they didn’t, and it is.
Michael,
You are correct that the US trade deficits of the 19th century, as a result of foreign direct investment, benefitted the US, just as the direct investment in China has been benefitting China.
However, where financial investment is concerned, the more a country receives, the worse it does, as shown for developing countries by three IMF economists in this paper:
http://www.kansascityfed.org/PUBLICAT/SYMPOS/2006/pdf/PrasadRajanSubramanian.0811.pdf
The mechanism is simple, foreign loans strengthen a country’s currency and make its products less competitive.
Howard
Michael,
I don’t think that Bob Lutz was referring to absolute figures. More about trends. At least that is how I took him.