Monday, October 19, 2009

The US and trade/policy problems with Russia and China

From Tyler Cowen (

"Chinese workers save a lot, maybe forty to fifty percent of their incomes.  There are some demographic reasons for that but it also suggests fear and foreboding.  They wonder if the Chinese economic miracle can continue.  There aren't full contingent claims markets in China but this quantity (of savings) is reflecting an implicit price for transferring wealth into possible bad world-states.  That implicit price suggests a fair amount of worry.

In the U.S. T-Bill market, in contrast, there is relative optimism and froth.  Lots of securities can be sold at rates close to zero.  That explicit price suggests not so much worry about the creditworthiness of the U.S. government and not so much worry about China.

The two prices contradict each other and they continue to do so because explicit arbitrage is not possible.  (Ideally, at least in neoclassical fantasy land, the U.S. government should be borrowing money from the Chinese and selling them back insurance at a higher price.)

From this portrait you can see why it is so hard to unwind the imbalances.  (Many expositions of imbalances focus on quantities and thus may obscure this point somewhat.)  If the Chinese workers are dealing with the correct price (implicit price), that means the worries are real and rates in the T-Bill market have to spike.  Ouch.  If the auction market for T-Bills is showing the correct price, that means the worries are false and at some point Chinese workers won't save nearly so much.  Again, rates in the T-Bill market have to spike.  Ouch.

Either way it ends in ouch.  There's a reason why, rhetoric aside, no one wants to end these imbalances.

So who has the right price?  The Chinese workers or the T-Bill bidders?  As usual, the truth probably lies somewhere in between."

Big Labor gets hit in Mexico

Former US Attorney General talks about the difficulties of trying terrorists in civilian courts
Russia and its unwillingness to play by the US' way on Iran
The UN Human Rights Council is a joke. By the way, props to Hungary, Italy, Netherlands, Slovakia, Ukraine and the US for being the only members of the council with principles.
Creative problem solving at its funniest.
and on Climate:
(For every 4 jobs the government "creates" in green energy, it'll be destroying 9 or more (conservative estimate) regular ones. It's only a good policy if marginal climate change by the policy is worth an additional 1.2 jobs per new job created (9/4 = 2.2 - 1 = 1.2)
As a side note that DOESN'T involve Russia and China, here's a healthcare proposal which seems plausible (the voucher version) 
Catastrophic care public option/vouchers, and normal care private?

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