Michael Pettis is a Senior Associate at the Carnegie Endowment for International Peace and a finance professor at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets. He has taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is also Chief Strategist at Guosen Securities (HK), a Shenzhen-based investment bank.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis has been a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
He can be contacted at michael@pettis.com.
Don’t forget to archive your old blog. It would be a shame to lose the old articles. (I truly enjoy reading the volatility machine.) Your blog is excellent. As an outsider to China though I must admit I care a bit less about the local stock markets going up or down. Do you think it would be possible to differentiate between sections of entries a bit more obviously? It would have been terribly easy to skip todays “To turn to something a little weightier and more abstract…”, that unfortunately was towards the end of a long entry. It could be as simple as writing three shorter articles each time (The market, China internal, China and the world).
Thank you and please continue sharing your ideas!
Michael,
Your insights are extremely thought provoking and I am sure I am only “catching” 30% at best. Thank you. However, my ego needs a good dosing of humility every once in a while and your site definitely offers that up with gusto.
I do have a “simple” question however. Years ago I assisted the American Samoan (Pago Pago) government to turn around their ailing public pension system, and then later went out to the Federated States of Micronesia to assist their Social Security Trustees to do the same thing.
While living in island countries, it became vividly apparent that the two prime economic priorities were 1) M-1 and 2) jobs. Maximizing profits by minimizing labor costs was death to both of those economies.
So, while the Corporate Train of “Competition” is screaming full-steam-ahead eastward to score maximum profit points on its scoreboard … the Family Bulldozer of “Survival” – seeking to feed, house, medicate, educate and nurture their family – has its blade on the tracks headed Westward. When and where they meet, not even the Iron horse will survive.
The game of Competition for Profits vs. Survival for Dignity can not continue. Cost cutting strategies via technological and outsourcing strategies may initially put points on the scoreboard … but at taken to its extreme … will eliminate the very jobs consumers need … to purchase and consume. The underlying principles of “People” must be optimized with “Profits.” Maximization of either spells a head on crash destroying the rails of life.
This head on crash has one other competitive show stopper.
Huge sums of global amassing capital (fractional lending, excessive currency printing and world record reserves in pension fund, sovereign wealth funds, etc) has jet fueled an unbelievable “Accelerated Auction Mania” driving up “Paper Asset Values” beyond recognition, common cents and reconciliation.
Please comment — and be blunt.
LCarson@ATICA.US
http://www.atica.us
Michael,
You and I have met in 2001/02 when you gave a lecture to Wharton MBA students, while i was a student there. We conversed a few times after that via email. I am happy to learn that you have a blog and are putting more of your views into the public space.
From some of your recent posts I see that you are very sensitive to the massive overcapacity in China and the possible outcomes that may have. I feel similarly, and I believe the overcapacity is global, not just China. I also believe that it necessary outcome of growth oriented capitalism and development of a society from pre-industrial to industrial to post-industrial. I wrote a piece from my firm a few weeks ago that I am pasting below for your review on this topic:
Curt
I believe that the global economy has achieved massive overcapacity in almost every industry. There are a few ways to deal with this overcapacity. One method is to permanently destroy some of the capacity, and this is most quickly done with war. There is nothing radical about this solution; it has been part of the capitalist tool kit since the dawn of commerce. The far more preferable method is for new markets to develop that will absorb the excess capacity. This is what happened for Japan as the Chinese boom served as an export market for Japan in 2003-2008. This has also been the method since 1945 for the chronic overcapacity problem of the OECD. Let’s review the history of development since 1900 to get a better perspective as to where we are now. WWI destroyed much of the capital goods in Europe during 1914-1918, setting the spring board for a decade of unprecedented growth in the US, as Europe borrowed from the US to rebuild itself with US built capital goods. By the late 1920s, Europe was rebuilt and added its production capacity to the global supply, in the process destroying corporate earnings everywhere. The 1930s depression was inevitable, as was the build up for war in Europe to destroy the excess capacity via WWII. The European war preparations and then active action was a great boast for the US economy as the US provided credit and capital goods to the belligerents. Further, the aftermath rebuilding of Europe and Japan were spectacular for the US economy again as it was able to provide vendor financing for the sale of massive amounts of capital goods. By the early 1960s, Europe and Japan were rebuilt and the excess capacity was becoming a problem. Corporations began to actively seek out new markets in newly independent Africa as well as Latin America. These new markets were developed through mercantilist policies of vendor finance, and it worked to absorb the excess capacity of the OECD. Unfortunately, these new markets, when they had built up production capacity, had no other new markets to sell to. Thus without new sources of demand, the economies of the OECD and the newly developed began to stagnate in the mid 1970s, ultimately leading to defaults in the newly developed nations. Thankfully a new source of demand emerged shortly thereafter in East Asia, which absorbed some of the excess capacity of the OECD. This East Asian market was also vendor financed from the OECD, and it too led to default by 1997. Again the globe would have plunged into massive excess capacity; however a very strange thing happened. The US had a technological revolution as information technology was introduced. This led the US to embark on a post-industrial economic structure, and the rest of the world was excited to provide credit to the US for this ‘new market’. This credit came not only from the other members of the OECD, but also from the East Asian developing countries – they were able to reverse the mercantilist policies to wage them against the US. This was a great error. There is no amount of information technology revolution that can surpass the productivity gains that result from moving from a pre-industrial to an industrial economy. Thus, the amount of borrowing done by the US during this period did not get fully absorbed by capital goods formation; instead the vast majority went to support consumption. That is, mostly borrowing without increasing productivity correspondingly. On the whole, a negative NPV project. Here we now sit, with the US credit fueled consumption binge having reached its logical conclusion and excess capacity continuing to build across the globe. We need new markets and we need those new markets to borrow to finance their development. Unfortunately, there doesn’t seem to be any markets willing to borrow to finance development. Partly because the Latin American and African countries have shown what a disaster that model of development can be. But also because the East Asians have demonstrated how successful export driven mercantilism can be as a path for development. Unfortunately, for mercantilism to work there must be a target to be mercantilist against.
This massive overcapacity, if not absorbed or destroyed, will be very destabilizing for many societies. Overcapacity of production means overcapacity of labor. Unemployment means social instability, either through political action or violence. The government can respond a number of ways to this overcapacity. The easiest response is to assume that this overcapacity will be absorbed shortly as new markets come online or as other nations’ capacity is destroyed (voluntarily or involuntarily). With this assumption, the government is justified in implementing large scale deficit spending programs to support employment. Sometimes these programs can achieve more than just a stop gap solution until new markets arrive; what I mean is that if the government spending is used on capital goods which have transformational externalities, new needs and wants can be created in the already existing markets. In essence creating markets from nothing. Examples are railroads, telephones, televisions, and internet. These technologies had the beneficial externality of creating needs (mostly wants) that previously did not exist, primarily because they democratized goods and information relative to geography. Thus these technologies were transformational. Any other government spending programs can either be of the form of completely wasteful (unemployment benefits) or nice to have (road repair) though still negative NPV. I do not expect the Obama stimulus to be any more effective than FDR’s WPA was in stimulating growth.
But what if new markets do not come online soon? The government will have borrowed immense amounts to waste on projects with negative NPV. This is exactly what the Japanese government has been doing since 1989. Labor is employed more or less, but it has all been ‘bridges to nowhere’ all the while amassing the largest relative debt on the globe. There is a logical end to this: at some point the government’s interest expense will be larger than its revenues and it will default.
There is a solution to this overcapacity problem that avoids many of the ugly outcomes of the other methods. That is, to accept that overcapacity exists and that it is a necessary outcome of growth oriented capitalism. However, instead of letting the market remove production and labor indiscriminately and thus having a large class of permanently unemployed, instead the government can mandate decreases in capacity through mandatory lengthy vacations and shorter work weeks. In essence, restrict the supply of labor and thus create a restriction in capacity. Of course this type of program means that effectively labor is now ‘job-sharing’, so that income per laborer is decreased, free time is in greater abundance, but unemployment does not increase. However, there is a problem. The lower incomes mean that accumulation of wealth on an absolute level is much more difficult than under the previous model. That is, economic mobility is far less possible, which in and of itself is a source of social unrest. So to eliminate this secondary effect, the government would have to be aggressive with wealth redistribution programs, particularly with wealth accumulated under the prior model.
Nov. 2012
Dear Curt
This is the most intelligent and comprehensive ‘big picture’ description of global economic development/current state I have read in a long time (with a four year delay). Congrats. Who are you, where do you publish more?
Right in the beginning you point to an impportant thought that is perhaps the driving force behind your scenario: The longest war free period in at least what used to be called the first world coupled with unprecedented technical evolution (providing the helping hand of nuclear deterrence). Having led not only to overcapacity but also to more wants than needs on the demand side: Simply, a state of saturation. Besides a massive overcapacity developed also in capital – too much money, not knowing where to go.
There are still second and third worlds that have to catch up – and their catching up provides a ‘market driven’ unvoluntary wealth redistribtion’ much more effective and aggresive than any government will ever devise; distroying and creating wealth globally. In fact governments/central banks appear to be more engaged in counter balancing these effects.
Ideally the borders between these worlds continue to dissolve: asset distribution, capacity, shifts in consumption, credit and investment balance each other out throughout the globe just as they did in the former first world. Not without hickups and with winners and losers, but on the whole with an expansion of the well being to a bigger majority. This could go on for a long time. My favourite economic number is GDP per capita.
One of the strongest fuels for the lust of war/violence is probably the sensation of loosing power once had. Most likely this will be the former first worlders challenge.
I would love to know what you think in 2012.
Ph. Klein
Michael,
I am rather nervous about the drought hitting China right at the moment when the global financial situation is still in a mess. President Hu Jintao and Premier Wen Jiabao had ordered an all out effort to combat the situation. As financial markets in China had been badly affected by the Sichuan Earthquake and the Snow Storm in the south the present drought will be another negative bias for the markets.
Appreciate your thoughts in this respect.
I agree with curl we realy need new stuffs .But we don’t know what kind of stuffs we can invent or even want?
The truth is ,European Nations didn’t bring about new great minds in the last half a century like the ones we recall from the renaissance.Where are modern ages Newtons and Maxwells ?All revolutionary stuffs which our modern and industrial age is based on, come from great theories shaped during the centuries of mental endeavours of giants who changed western man’s attitude to life ,to matter and to the world around him.I really think we are living in the age of Intellectual povery.
Thanks a lot for sharing your thoughts.
FYI links from RSS to your articles have been broken for some time
e.g.
http://mpettis.com/2009/09/more-trade-tensions-and-the-very-limited-advantage-of-relative-poverty/
Hi Michael,
I was lucky to get your last post “More trade tensions, and the very limited advantage of relative poverty”. “Feed” made a god job but not any more.
I miss the comments. Wouldn´t it be the case to create a group for comments in addition to your blog while your students try to solve the problems?
Regards,
Christopher.
Your September commentary is not coming up. I live in Seoul and cannot access the site. Is there a problem? thanks
I also wanted to mention that I haven’t been able to view your blog posts since late September. Is something wrong or being blocked?
Well, this page seems to be working.
Michael, I would like to know your thoughts on Steve Keen’s position that the Rise in Chinese savings was not a root cause of this bubble……..
http://www.debtdeflation.com/blogs/2009/10/04/debtwatch-no-39-october-2009-in-the-dark-on-cause-and-effect/
The first problem with this argument, which Lazear acknowledged in his speech, was that the textbook would have predicted that America would be the saver and China the borrower. America is supposed to be the mature economy with high incomes, high savings, and less opportunities for a high return on capital, while Chian is supposed to be the developing economy with lower incomes, lower savings, and many opportunities for a high return on capital.
But the real problem with the textbook argument is that its cause and effect relations are, to put it bluntly, “arse about tit”.
The textbook argues that savings must occur first before investment can occur—and since the poor Chinese happen to be good savers, while the rich Americans are lousy savers, the financial flows went from China to the USA. So the US crisis is all China’s fault.
In fact, the action in a credit-driven economy begins with the lender: lending creates the money which—once spent by the borrower—turns up in other people’s bank accounts. The actual causal sequence that gave us the GFC was therefore:
1.American lenders lent to Americans to finance the housing and stock market bubbles, and copious purchases of consumer goods as well as Americans falsely believed their wealth was growing as house and share prices skyrocketed;
2.These American borrowers spent large slabs of this borrowed money on imported Chinese goods;
3.The Chinese recipients of this American spending racked up a large surplus of US dollars, which added to Chinese foreign currency reserves;
4.Some of these reserves were used to purchase US assets, including Subprime bonds but also government bonds, equities, and other financial assets around the world.
So the problem began, not with Chinese saving, but with American lending. The huge foreign exchange surpluses accumulated by the BRICs, Japan and to some extent Europe began in the profligate lending of the American financial system during its latest and greatest Ponzi bubble. They are a symptom of the problem, but not its cause.
This argument is commonplace in the Post Keynesian school of economic thought—but foreign to Neoclassical thinking, which still makes the mistake of imagining that credit money is no different to a commodity money system (like gold) where you can’t lend until you after you have accumulated a stock of that commodity.
In fact, in a credit system lenders can and do create money simply by the double-entry book-keeping process of creating a loan and a deposit at the same time, as I explained in the “Roving Cavaliers of Credit” post. The failure of neoclassical economics to realise this is one of the major reasons why they don’t understand the economy. Instead they have a model that might be of some assistance to a tribal marketplace in the New Guinea highlands (or of some relevance to a medieval fair), but which bears no relation to our modern credit-based economy
Another great post.
You allude to the US production problem which is seldom mentioned by other commenter’s.
I see many statements from economists, politicians, and various other commentators that the US needs to deal with its excessive consumption. IMHO the key to the current problems in the US is not excessive consumption but rather insufficient production.
The question is: how can the US increase production in the face of unfair rigged trade practices by persistent surplus countries that make it impossible for US producers to compete? People decry the tire tariffs, but never say what the US can actually do to get the surplus countries to take this seriously and take action to get their trade into balance. Unless the US and other trade deficit countries start playing hardball I do not see how productive action is going to occur. A few ideas for actions by the US are given in the post such as increasing taxes on consumption and reducing taxes on savings or investment. While these would have some effect over time I would expect them to be fairly slow acting and of limited effect absent significant changes made by the surplus countries. Any suggestions from any readers as to what the US can actually do get things into balance in a reasonable period of time absent “protectionist” measures? The idea of cutting consumption in order to increase the savings rate is simply not going to cut it! IMHO the trade surplus countries will need to take primary responsibility for getting things into balance if anything approaching a “free trade” paradigm is to continue. Will they do it without serious outside pressure?
Very interesting blog. Greetings from Germany to China
Mr. Pettis: I enjoy reading your blog but have to admit that much of it is way over my head. You use a lot of abbreviations and terms the frankly, I am just unfamiliar with. Would it be possible in the future to add a page explaining: abbreviations and other information for the non-economist? I have been traveling to China for the past 10 years and have been fascinated at how a Communist country can be so entreprenurial (the most entreprenurial people I have ever met). Thank you.
Thank you for your informative posts that even a non-economist like me can understand. You’ve written several on the China real estate bubble, including “The capital tsunami is a bigger threat than the nuclear option” Jul 14th, 2010, but could you clarify your prognosis for the ailing US economy if the real estate bubble in China pops? thank you! Tama
Michale,
I teach marketing at Kellogg in Chicago and do some business in China. I enjoy reading your stuff and just wanted to tell you that. Maybe we can conect when I am over there or you are here.
Regards,
Phil Corse
Professor,
With china bit by bit becomming the major focus points of any asset alocation discussion, I´ve found your articles to bring important insights that i feel are way more usefull than many from major Broker houses / Banks.
Just bookmarked it. Cheers
Prof Pettis
I have been an avid reader of your comments for several years now, learning a great deal about China (specifically) but macroeconomics in general. In many respects your views on the “financing” of the US deficit fall in line with the Modern Monetary Theory views of macroeconomcs. Am I correct in that assumption? Do you align yourself wholly or partly with this school of economic thought. Thanks and keep up the great writing.
With kind regards Stuart
great post; please subscribe me to your distribution list
Your posts are just too long.
Let’s keep things simple. As with the announcement by the South Korean and China central bank yesterday slowly but surely countries will trade in their own currencies. The largest beneficiary of this will be the emerging markets in Africa, Central Asia, Iran, Russia and ASEAN. China will provide finished goods for resources. Win Win. The 2 trillion plus that the US and Europe deficit a year aka printed purchasing power will slowly disappear and the the standards of living for those resource rich emerging markets will rise by a corresponding purchasing power lost by US and Europe. Basically printed purchasing power will decline
What about your bangin’ mrusic interests mang?!
Please keep me updated on your new posts
Best wishes
Christian Ogier
Can someone explain how to subscribe to this blog? There doesn’t seem to be RSS or a subscribe button. Am I missing something?
I thought your article in today’s FT was well thought out and least someone is attempting to place a different perspective on matters – Joe